Sanctions have sharply raised chance of a Russian default, JPMorgan warns

Russia’s stock market remains shut down. The ruble is worth less than a penny. And Western businesses are fleeing. JPMorgan warns a Russian default could be next.

“Sanctions imposed on Russia have significantly increased the likelihood of a Russia government hard currency bond default,” JPMorgan emerging markets strategists wrote in a note to clients on Wednesday.

It’s not necessarily that Russia doesn’t have the cash to make its debt payments. The Central Bank of Russia lists a staggering $643 billion of international reserves.

However, JPMorgan said sanctions leveled by the United States on Russian government entities, countermeasures within Russia to restrict foreign payments and the disruption of payment chains “present high hurdles for Russia to make a bond payment abroad.”

For instance, sanctions on Russia’s central bank and the exclusion of some banks from SWIFT, the high-security network banks used to communicate, will impact Russia’s ability to access foreign currency to pay down debt, according to Capital Economics. That includes Russia’s stockpile of reserves as well as cash from export revenue.

Russia has more than $700 million in payments coming due in March, mostly with a 30-day grace period, according to JPMorgan. 

Some believe the Kremlin could be setting the stage for an intentional default to punish the United States and Europe for crushing its economy.

“Putin is 100% going to default,” hedge fund manager Kyle Bass told CNN in a phone interview on Wednesday. “The West is strangling him. Why would he agree to pay the West interest right now?”

Capital Economics noted that Russian authorities have already prohibited the transfer of coupon payments on local currency sovereign debt to foreigners, underscoring the point that authorities are “acting with scant regard for foreigners’ holdings of Russian assets.”

“Russia could use default as a way of retaliating against Western sanctions to inflict losses on foreign lenders. It’s not far-fetched to think that the Russian authorities could ban foreign debt repayments,” Capital Economics wrote.

Russia, currently the 12th largest economy in the world, last defaulted on its debt in 1998, setting off a crisis that spread overseas.

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