CNBC: Talk we must about a global contagion from a Russian default; Update: Putin signs law to seize assets

CNBC: Talk we must about a global contagion from a Russian default
AP Photo/Alexander Zemlianichenko

Must we? Of all the potential outcomes from the economic war being waged against Russia, a 2008-esque debt contagion seems among the more remote. The closer a default comes, however, the more the chances increase past a non-zero standing. CNBC says the risks of a global contagion may still be remote, but a couple of major failures may test the system:


International Monetary Fund Managing Director Kristalina Georgieva said Sunday that sanctions imposed by western governments on Russia in response to its invasion of Ukraine would trigger a sharp recession this year. She added that the IMF no longer sees Russian sovereign debt default as an “improbable event.”

Her warning followed that of World Bank Chief Economist Carmen Reinhart, who cautioned last week that Russia and ally Belarus were “mightily close” to defaulting on debt repayments.

Despite the high risk of default, however, the IMF’s Georgieva told CBS that a wider financial crisis in the event of a Russian default was unlikely for now, deeming global banks’ $120 billion exposure to Russia “not systematically relevant.”

However, some banks and investment houses could be disproportionately affected. U.S. fund manager Pimco started the year with $1.1 billion of exposure to credit default swaps — a type of debt derivative — on Russian debt, the Financial Times reported last week. A spokesperson for Pimco wasn’t immediately available for comment when contacted by CNBC.

The Russian state has a host of key payment dates coming up, the first of which is a $117 million payment of some U.S. dollar-denominated eurobond coupons on Wednesday.

Russia wants to get around the default by using rubles to make its payment. The problem is that these bonds excluded rubles as a form of payment, which means that these creditors have a tough choice. Either they have to take nearly worthless currency and get a few cents on the dollar, or lose their investment altogether:


Russia is threatening to pay foreign debts in rubles after a number of Moscow’s top banks were sanctioned in response to the country’s invasion of Ukraine.

The Russian government is scheduled to pay $117 million on Wednesday for a pair of its dollar-denominated bonds, according to Reuters. …

If the payments cannot go through, the finance ministry said it would repay Eurobonds in rubles, according to Reuters, which has plummeted to record lows since Russia’s invasion.

Russian Finance Minister Anton Siluanov wrote in a statement on Monday that Moscow has “the necessary funds to service our obligations.”

In other words, the default is coming one way or the other. Even if bondholders accept rubles rather than the currencies to which these bonds were tied, Russia isn’t going to be able to sell any more of its debt under the circumstances. For those who bet big on Russia, the Sovietization of the Russian economy means a total loss. However, the numbers here are still relatively small, which means that financial institutions can probably absorb the hit as long as the rest of the global economy doesn’t go into a tailspin.

Perhaps Putin realizes that, too, which means that Western companies won’t mind bugging out and taking as many of their assets with them as they can. A few days ago, Putin’s regime began threatening massive expropriations of Western assets when those firms pull out. Today they’re escalating to the full Maduro of arresting executives for the crime of getting the hell out of Dodge:


Russian prosecutors have issued warnings to Western companies in Russia, threatening to arrest corporate leaders there who criticize the government or to seize assets of companies that withdraw from the country, according to people familiar with the matter.

Prosecutors delivered the warnings in the past week to companies including Coca-Cola Co. KO +2.56% , McDonald’s Corp. MCD -0.15% , Procter & Gamble Co. , International Business Machines Corp. IBM +0.59% and KFC owner Yum Brands Inc., YUM -2.86% the people said. The calls, letters and visits included threats to sue the companies and seize assets including trademarks, the people said.

Russian President Vladimir Putin last week expressed support for a law to nationalize assets of foreign companies that leave his country over its invasion of Ukraine. The prosecutors’ warnings were directed at companies across sectors, including technology, food, apparel and banking, the people familiar with the matter said.

The warnings have prompted at least one of the targeted companies to limit communications between its Russian business and the rest of the company, out of concern that emails or text messages among colleagues may be intercepted, some of the people said.

That threat has had the expected reaction:

Other companies have moved to transfer executives out of Russia, other people familiar with the matter said.

That’s what happens when you go the full Maduro. Nicolas Maduro followed that playbook in Venezuela, which Hugo Chavez first established when he began expropriations as he imposed hardline socialism on the previously advanced economy. That resulted in a brain drain that left party apparatchiks in charge of technical tasks at which they were utterly incompetent, especially in the oil industry. The net result also paralleled the Soviet experience, where innovation relied on industrial espionage (also still a problem in China) and corruption covered up failure after failure, while also contributing to those outcomes.


Chernobyl was the most iconic of those systemic failures. It was far from the only example.

The Russian government later denied the WSJ report, calling it “fake news” and insisting that Americans could still choose to invest in Russia. Perhaps, but it’s difficult to see why anyone would under these conditions.

Update: Ladies and gents, the full Maduro is upon us … or at least upon Russians:

Russian President Vladimir Putin has signed a law allowing Russian airlines to keep foreign aircraft for use on domestic flights, according to state news agency TASS.

Moscow had signaled last week it could take such action in response to far-reaching Western sanctions.

The new law, TASS said, would allow Russian airlines to retain and operate planes rented from foreign aircraft lessors that have pulled out of the market and canceled contracts because of the sanctions.

That’s yet another Rubicon, as Washington Post economics reporter Heather Long grimly notes:

He hasn’t actually seized any assets yet, but when he does, Russians can write off their chances of economic prosperity in this lifetime.


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John Sexton 3:20 PM on September 27, 2023