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The Russian Central Bank headquarters, in Moscow, on Feb. 28.NATALIA KOLESNIKOVA/AFP/Getty Images

Russia is extremely likely to default on its external debts and its economy will suffer a double digit contraction this year, after the West launched sanctions unprecedented in their scale and co-ordination, the Institute of International Finance said on Monday.

The IIF estimates that half of the foreign reserves of the central bank, which on Monday hiked interest rates and introduced some capital controls, are held in countries which have imposed asset freezes, severely shrinking the firepower policy-makers have to support the Russian economy.

The central bank would prioritize the protection of domestic savers with foreign investors “one of the last on the list.”

“If we stay here and this (the crisis) escalates, then default and restructuring is likely,” Elina Ribakova, the IIF’s deputy chief economist told reporters during a media call. She said default would be “extremely likely,” although the relatively small size of foreign holdings – at around $60-billion – of Russian debt would limit the fallout.

Default on domestically held bonds was far less likely, she added.

Russia last week invaded Ukraine, leading the West to impose a series of sanctions. These have included the freezing of the central bank’s assets, removal of many Russian banks from the global payments system SWIFT and the blacklisting of individuals and entities. Russia calls its actions in Ukraine a “special operation.”

The sanctions sent the ruble plunging to record lows on Monday, and Western investors are scrambling to dump Russian assets as the country finds itself increasingly isolated.

The IIF’s Ribakova said the sanctions, which could yet be toughened even further, were “the most severe economic sanctions imposed on a country” ever and would send the Russian economy into a tailspin, with a low double-digit contraction this year likely and inflation soaring by a double digit amount too.

She said conversion of Russian domestic foreign exchange holdings into rubles was also on the table, although the central bank would be reluctant to deploy that initially as it tried to spare hurting domestic savers.

The central bank retains tools to try to calm markets, including hiking rates further, providing liquidity to domestic banks and limiting capital flows. It may also be forced to impose bank holidays to stop a run on banks, the IIF said in a report issued on Monday and written before the latest sanctions.

Ribakova said an estimated $10-billion had been pulled from Russian banks on Friday alone.

The sanctions could also get tougher, including preventing U.S. and European entities from trading in existing Russian government debt, expanding the list of institutions banned from SWIFT and removing energy-related trade exclusions.

Such measures would amplify financial, trade and pure contagion risks for the global economy too, and especially Europe, Ribakova added.

In its earlier report the IIF said that should Russia’s biggest lenders, Sberbank and VTB, get kicked off SWIFT, expect “a fundamental destabilization of the entire financial system, with profound implications for the real economy.”

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