Credit insurance shows Russia faces 99% risk of default within a year

The Russian ruble erased heavy losses it suffered in the weeks after President Vladimir Putin sent troops to Ukraine, but the cost of insuring Russia’s public debt jumped to signal record likelihood 99% payment default in the year.

The currency rose above 81.16 to the dollar, the level at which it closed on February 23 – the day before President Putin launched his attack. It’s a recovery that comes at an ironic time, as sweeping sanctions cripple Russia’s economy and send the government to the brink of default.

The EU and the United States are trying to coordinate a new round of financial sanctions against Russia, while the Russian Finance Ministry has said its attempt to service the debt in dollars has been blocked, potentially bringing the country closer to its first exterior defect in about a century.

The ruble fell immediately after the February 24 invasion amid international sanctions that effectively ended its era as a freely traded currency. But tight capital controls – including a ban on foreigners selling Russian assets as well as mandatory hard currency sales by exporters – have helped the ruble regain ground.

President Putin has also demanded that foreign buyers of Russian natural gas switch to local currency payments. For now, however, Russia could continue to benefit from cash inflows, as it sells natural gas and oil at high prices.

At current prices, Europe sends about $450 million (411 million euros) per day to Russia for crude oil and refined products, about $400 million per day for gas and about $25 million for coal, according to think tank Bruegel.

Russia moved closer to technical default after foreign banks refused to process about $650 million in dollar payments on its bonds, forcing it to offer rubles instead.

While the Finance Ministry said it “considers it has fully fulfilled its obligations,” none of the affected securities allowed payment in rubles, according to the bond documents. Both notes have a 30-day grace period, according to data compiled by Bloomberg. The cost of insuring Russia’s public debt now signals a record 99% chance of default within a year.

Sale of cars

There was more evidence of the fallout on the Russian economy. New car sales in Russia fell 63% year-on-year in March, contracting for a ninth consecutive month, as the industry faced severe shortages and soaring prices.

The Association of European Businesses (AEB) said new car sales in Russia stood at 55,129 vehicles in March, about half the number sold in February. Sales of Lada cars by Russia’s biggest automaker AvtoVaz fell 64% in March from a year earlier, according to AEB data.

The Russian automotive market was among the most promising in the world until 2014, encouraging foreign manufacturers to build their factories there.

Meanwhile, GlaxoSmithKline said its consumer arm had stopped shipments of supplements and vitamins to Russia following Moscow’s invasion of Ukraine and would prioritize the supply of over-the-counter drugs for basic needs.

Bloomberg and Reuters

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John A. Bogar