A Russian default is a matter of when, not if

Unless Vladimir Putin comes to his senses quickly and withdraws from Ukraine, Russia is about to be kicked out of international capital markets for a very long time. All bondholders still invested in national debt are on their own.

The Russian government has tried to keep payments to its creditors going, but the US Treasury’s Office of Foreign Assets Control is relentlessly and expertly tightening the noose to stop these money flows. All channels and channels of communication allowing entities linked to the Russian government to continue to service their debts are closed. Rating agencies and benchmark bond index providers are dropping Russian bonds from their business. A formal government default is expected to be triggered in the coming weeks.

Russia has indeed acknowledged its pariah status by threatening legal action and declaring that it will halt bond sales for the rest of the year. It is unclear who or what she might successfully pursue, and the prospect of further Russian debt had already evaporated when she invaded Ukraine on February 24. As Russian Finance Minister Anton Siluanov commented in Russian newspaper Izvestia, borrowing costs on any sale would be “cosmic.” It will be many years before we see the country exploiting the dollar, euro or other international currency market, but Russia is also stopping domestic ruble issuance.

Not really a problem when Europe still pays $1 billion a day for Russian energy. If coal sanctions are followed by oil and gas bans, those cash flows would end and his inability to borrow would start to hurt. “Russia will be in default for maybe a decade,” says Tim Ash, emerging markets strategist at Bluebay Asset Management. “That means no access to international capital markets, very high borrowing costs, even from the Chinese, no investment, no growth, low living standards. It’s a terrible prospect for Russia. and the Russians.

The latest shoe to fall is in the credit default swap market, with the determination committee of the International Swap Dealers Association ruling that state-owned Russia Railways JSC is in default. The CDS market is where a debt issuer’s default protection is bought and sold; now that the precedent has been set, the ruler himself and other Russian entities will surely soon suffer the same fate.

The ISDA decision triggers a process to determine how major investment banks and fund managers compromise on settlement of swaps, which would typically be conducted via an auction of available acceptable securities. But since it will be nearly impossible to deliver any of the underlying debt securities as no western bank can process the transactions, a simple cash payment on the CDS contracts seems likely. The percentage of compensation for bondholders has not yet been resolved, although it is likely to be close to the total amount insured. What is important for the financial industry, which has experienced several disputes over credit derivatives, is that the system seems to be working as expected this time around.

Russian borrowers, however, face a significantly worse outcome than during the previous Russian debt crisis in 1998, when only ruble-denominated payments were missed while foreign currency creditors remained in full, and the rest of the everyone was rallying to get him out of the country. knees economically in the following years. This time, Russia is firmly alone, facing a financial crisis that she herself caused and for which she alone is responsible.

More from Bloomberg Opinion:

• How ‘Ukraine fatigue’ is taking hold of the markets: John Authers

• US should show India it’s a better partner than Putin: editorial

• Backdoor keeps Russian oil flowing to Europe: Javier Blas

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. He spent three decades in banking, most recently as Chief Market Strategist at Haitong Securities in London.

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