Russian Inflation Soared Last Month, Threatening a Sovereign Debt Default

Russian Central Bank said the country’s inflation rate continues to rise, with the annual inflation rate in early April was close to 17%, according to reports on April 8th. As a result, Russian ability to meet its debt repayment obligations has increasingly become the focus of attention. Since Russia invaded Ukraine, the United States and Europe have imposed sanctions on Russia.

Many Western companies and banks have withdrawn from Russia, and major Russian financial institutions have also been affected by sanctions. Nearly half of Russia’s central bank’s $640 billion in gold and foreign currency reserves has been frozen, limiting its ability to use the global payment system. Russia’s important sources of income and energy exports have also been greatly affected. The UK estimates that Russia is heading for “the worst recession since the collapse of the Soviet Union.”

In addition, after the sanctions, the US Treasury Department implemented a case-by-case review of the Russian government repayment. After the US Treasury Department blocked the Russian government from using reserves deposited in US banks to pay its debts, Russia said it plans to use rubles to pay its sovereign debt in dollars; but bonds denominated in U.S. dollars, repayment in another currency would result in a default. In the event of insolvency, Russia will not be able to re-enter the international market until they fully pay their creditors and resolve the legal disputes related to the default. Although sanctions against the Russia and its companies would be ended someday, foreign company corporate partnerships and investors may be reluctant to re-engage in Russian investments, therefore, Russia might face a long-term economic depression as a result.