Russia default on foreign debt a logistical issue, not financial crisis; a non-event for Indian stock market, say experts

Amid ongoing tension between Russia and Ukraine, the former has defaulted on foreign debts for the first time since the Bolshevik Revolution a century ago, primarily due to a slew of sanctions by the West

The country had a Sunday night deadline to meet a 30-day grace period on interest payments originally due May 27. Source: Reuters

Amid ongoing tension between Russia and Ukraine, the former has defaulted on foreign debts for the first time since the Bolshevik Revolution a century ago, primarily due to a slew of sanctions by the West. As per reports, Moscow owes about $40 billion in foreign bonds, about half of that to foreigners. The country had a Sunday night deadline to meet a 30-day grace period on interest payments originally due May 27.

Russia calls any default artificial because it has the money to pay its debts but says sanctions have frozen its foreign currency reserves held abroad. As per news agency PTI, Russia had around $640 billion in foreign currency and gold reserves before the breakout of the war, much of which was held overseas and is now frozen.

It comes amid a slew of sanctions on Russia by the western countries led by the United States (US).

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Meanwhile, the sanctions on Russia do not seem to be easing anytime soon with the reports of some Western nations planning to officially ban imports of gold from Russia for its invasion of Ukraine.

On Monday, a senior U.S. official told Reuters that the Group of Seven rich democracies will commit on Tuesday to a new package of coordinated actions aimed at increasing pressure on Russia over its war in Ukraine and will finalize plans for a price cap on Russian oil.

How does it impact Indian, world markets?

However, experts believe the event will not have much implications on the Indian stock markets. Given the nominal contribution to the world GDP and India’s miniscule exposure to Russian debt, the development will not have any bearing on the Indian market. They believe the action was largely due to sanctions on Russia, forcing it to default as the country has enough cash due to its energy trades post the war.

A logistical issue and not a financial crisis

Roopali Prabhu, CIO and Co-head of Products & Solutions, Sanctum Wealth, believes that the current default was inevitable since Russia’s foreign currency reserves are frozen and the country is cut off from the global financial system.

Even when Russia has the cash to pay back, thanks to its unabated energy trade, it can’t honor the debt, because of the sanctions and financial detachment from the western world, underlines the expert.

Prabhu believes it’s an entirely logistical issue and not a financial crisis.

"The current Russian default has no direct bearing on Indian markets as India’s exposure to Russian debt would be minuscule. Globally, there will be pressure on institutions that subscribed to Russian foreign debt, which too wouldn’t have widespread consequences on financial markets because Russian foreign debt doesn’t amount to much in the overall Asian basket," said Roopali Prabhu.

A non-event for Indian stock markets

As far as the world market is concerned, the expert says the default, though symbolic, would be close to being a non-event for the world’s financial markets.

Parth Nyati, Founder, Tradingo, too echoed agreed with Roopali stating the Russian default on the foreign debt will be a non-event for Indian stock markets.

The markets globally have already discounted this event, however, there could be a possibility of further isolation of Russia from the west, said Nyati.

"Further, the contribution of Russia to world GDP is nominal and due to a high crude oil and natural gas prices, Russia has been able to earn record current account surpluses in foreign exchange. Thus, leading to the strong performance of the Russian Ruble despite the massive sanctions," the expert added.

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