Default is imminent
Russia’s state bankruptcy would hit German banks
3/9/2022 7:36 am
Russia’s credit rating is falling to a junk level, and the Russian state cannot fall back on cash reserves because of the sanctions. There is a risk of national debt bankruptcy. German banks, which have made a lot of money from Russia’s flourishing oil business, would also suffer.
The President of the German Institute for Economic Research (DIW) in Berlin, Marcel Fratzscher, considers a national debt bankruptcy in Russia to be very likely in the coming months. Because of the western sanctions because of the war against Ukraine, there is a high risk that Russia will not service its debts to international investors, said Fratzscher. In the event of a default, there could be turmoil on the financial markets.
“The Russian state has very little foreign debt,” said the economist. By exporting oil and gas, Russia has achieved large trade surpluses and has been able to significantly reduce its debt. Due to the sanctions, however, there is no longer free access to the cash reserves. “I fear the conflict will spread to the global financial system, where Russia and its partners will seek to create disruption to hurt the West’s economy.”
According to Fratzscher, German investors, including some banks, would also suffer from a Russian state bankruptcy. However, the private lending business in particular is likely to be adversely affected by these financial institutions. “German financial institutions have consciously taken these risks in recent years and have made good money from them. The German state should therefore not compensate them for these losses.”
Russia arrived at junk level
Fratzscher’s biggest concern is the money market in the euro zone. Here, the Russian central bank and Russian private banks played an important role for liquidity. “I expect the European Central Bank to increase its liquidity allocation and improve financing conditions again to avoid disruptions.” Because of the war, a more expansive monetary policy can be expected – especially in Europe.
The US rating agency Fitch recently downgraded Russia’s creditworthiness again. The agency rated the risk that Russia would no longer be able to repay its national debt as “imminent” on Wednesday night. The West has imposed tough financial sanctions on Russia for its war of aggression in Ukraine and has blocked the Russian central bank from accessing most of its vast foreign exchange reserves abroad.