Russia’s $150 Billion Default: What It Means For Your Share Portfolio

"Don't buy extra flour or gasoline" – World Bank President warns of souring economic conditions.

Russia’s $150 Billion Default: What It Means For Your Share Portfolio

Russia’s economy is on a substantial decline. The ruble has collapsed, inflation is surging toward rates of nearly 20% and now a potential default that could ruin the entire economy is just around the corner. 

Because the Ruble has shed so much value, international lenders aren’t taking payments in Russia’s currency, meaning that the government will have to find a new way to pay its US$117 million interest bill on bonds this Wednesday. 

What would a Russian default look like?

If Russia fails to pay its foreign-debt bills, it could lead to an eventual default of approximately US$150 billion in foreign-denominated debt, which is owed by major corporations and the government itself. 

While the outcome of such a default wouldn’t be as severe as the 1998 Russian collapse, as the markets are already well aware of Russia’s economic woes, it could still create unexpected waves throughout the global economy. 

Once a country defaults, especially one as large as Russia, it can be cut off from bond-market borrowing until the default is figured out and investors regain confidence in the government’s ability to secure assets. This means that markets may become further disinterested in Russian financial assets.

Flow on effects

Russia is a major exporter of both crude petroleum and wheat, meaning that prices for both of these assets could see substantial increases following continued Russian economic turmoil. The west is already experiencing a huge series of flow-on effects from sanctions that the US and the EU have placed on Russia. As allied nations refuse to purchase Russian oil, petrol prices have risen dramatically across Europe, the US and Australia. 

Speaking to New York Magazine, Nigel Gould-Davies, senior fellow for Russia and Eurasia at the International Institute of Strategic Studies, said that while the US and other western nations are currently experiencing some market distress, there’s nothing major to fear from a Russian default. 

“The United States, as issuer of the major global reserve currency, has a power that no other country has currently.” 

Speaking on the potential for Russian backlash in the current “economic war”, Gould-Davies said that apart from withholding production of goods, Russia really can’t inflict any substantial damage to western powers. 

“There’s nothing proportionate, nothing conceivably approaching that, that Russia can inflict in response. Russia’s only effective response is to stop the outflow of things that other countries buy and value, and that’s essentially stuff you get out of the ground — oil, gas, metals, and minerals and so on.”

What does this mean for stocks?

In regards to the stock market, investors can expect to see negative price action continue while global conflict drags on. Because the US Federal Reserve has hiked interest rates, and with general inflation continuing to grow in both the US and Australia, investors should probably get used to seeing red in the portfolio. Global market conditions are simply too uncertain for institutions and large investors to keep piling huge sums of money into markets.

The S&P 500 is already down 11.1% year-to-date and the ASX has mirrored this action, also down 11.4% from Jan. 1 this year.

What does this mean for crypto?

Unfortunately, investors probably shouldn’t get too excited about digital assets either. Despite the general increase in positive sentiment towards crypto adoption globally, markets haven’t exactly been taking the developments to heart. The total crypto market is still down 24% year-to-date, and rumours of Bitcoin and other cryptocurrencies becoming an economic safe haven for Russian citizens were quickly dashed as ruble-denominated Bitcoin purchases plummeted despite Russian inflation surging.

Until major market conditions begin to change, such as Russia and Ukraine coming to some form of positive peace agreement, experts are hinting that crypto investors could be wise to break out the umbrellas, as it looks like the financial drizzle may be here to stay.

Short-term outlook

Painting a somewhat dire picture for the short-term, World Bank President, David Malpass warned people against hoarding bread and gasoline on Monday, March 15, at a virtual event hosted by the Washington Post. 

“The right thing to do in these current circumstances is not to go out and buy extra flour or extra gasoline, it’s to recognize that the world is a dynamic global economy and will respond. There’ll be enough to go around.”

While Russia continues to create major potholes for investors in the global market, there is ultimately nothing the country can do to majorly upset the status quo in the long-term, shy of it further escalating its military action against Ukraine and neighbouring countries. 

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