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Fitch Ratings warns Russia is set to default on its debts as sanction bites

Russia will default on its debts ‘imminently’, a leading credit rating agency has warned, as sanctions over Ukraine continue to pummel the country’s economy.

The warning came from Fitch Ratings on Tuesday which again downgraded Russia’s sovereign debt rating farther into junk territory from ‘B’ to ‘C,’ saying the decision reflects the view that a default is ‘imminent.’

Like other major ratings agencies, Fitch had already slashed Russia’s rating earlier this month to ‘junk’ status – which is the category of countries at risk of not being able to repay their debt.

“The ‘C’ rating reflects Fitch’s view that a sovereign default is imminent,’ the agency said in a statement, adding its new downgrade came because recent developments had ‘further undermined Russia’s willingness to service government debt.”

Russia’s financial markets have been thrown into a turmoil by Western sanctions after President Vladimir Putin ordered the invasion of Ukraine, raising significant concerns over its ability and willingness to pay its debts.

The agency said “the further ratcheting up of sanctions, and proposals that could limit trade in energy, increase the probability of a policy response by Russia that includes at least selective non-payment of its sovereign debt obligations.”

The rating firm pointed to Presidential decree, which could potentially force a redenomination of foreign-currency sovereign debt payments into local currency for creditors in specified countries.

“This rating action follows our downgrade of the Long-Term Foreign-Currency IDR to ‘B’/Rating Watch Negative on 2 March, and developments since then have, in our view, further undermined Russia’s willingness to service government debt,” Fitch said.

“This includes the Presidential Decree of 5 March, which could potentially force a redenomination of foreign-currency sovereign debt payments into local currency for creditors in specified countries.”

On Tuesday, the United States and Britain announced they were cutting off Russian energy imports – the US ban is effective immediately, while London said it would phase out oil imports by the end of the year.

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If Russia were to default on a debt payment, it would be the first time since 1998.

A country defaulting on its debts can have a knock-on effect on other economies, particularly those with close financial ties.

In light of the war in Ukraine and the sanctions being imposed, several countries are working to cut any dependencies they have on Russia – particularly on its resources such as gas and oil – but also other business links.

Speaking to the BBC, Shane Oliver of investment management company AMP Capital said he believed Russia was effectively already defaulting on its debts.

He also said that the knock-on effect on other nations should be minimal.

Defaulting “will only service it in much depreciated roubles anyway and foreign investors are offloading it at fire sale prices. Fortunately the global exposure to it is relatively low,” he told the broadcaster.

On March 16, Russia is due to pay $107 million in coupons across two bonds, though it has a 30-day grace period to make the payments.

The ‘C’ rating in Fitch’s assessment is only one step above default, bringing it in line with the Moody’s current equivalent score of ‘Ca’.

Peers Moody’s and S&P had also lowered their sovereign ratings of Russia.

The country is facing the gravest economic crisis since the 1991 fall of the Soviet Union after crippling sanctions were imposed on almost its entire financial and corporate system.

As of the morning of March 9, $1USD was equal to 133 Russian roubles. Before the invasion on February 24, the value was around 84 roubles to $1USD – demonstrating its rapid value collapse.

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