Russia Owes the World Some Money

In the midst of a horrific human tragedy, sanctions are flying around the world to cut Russia out of an interconnected, global economy.

Now, among the surging financial risks around the world, the possibility of a Russian default is among the least understood. Morgan Stanley and Fitch have said that it’s possible that the country could decline to pay foreign creditors in dollars, which could result in a sovereign default at a massive scale.

Russia has $117 million in coupon payments due on March 16 and a grace period of almost a month that follows. In the event of a foreign debt default, it would be the only such event to happen since the Bolsheviks refused to recognize obligations a century earlier.

Banks began weaving operations into Russia during the 1990s after the fall of the Soviet Union. Some -- namely Goldman and JPMorgan -- were key players surrounding Russia’s default on its domestic debt in 1998. (This New York Times profile that year is perhaps one of the fullest accounts).

The Russian government and corporations turned to U.S. and European banks to reconfigure financial obligations. But now many financial firms are pulling back from the country with some of the biggest counter-parties facing sanctions, including the Russian central bank.

As the International Monetary Fund’s managing director warned this week: “It’s not that Russia doesn’t have money, Russia cannot use this money.”

There’s a debate on whether it’s a true default if Russia pays creditors in rubles. Regardless, more than $40 billion of credit default swaps could be rendered worthless given that sanctions prevent settlement through the underlying bonds, a range of strategists told Bloomberg.

Major investors are marking down losses as investments sour quickly. Sovereign debt is plunging, and corporate debt feels similar pain.

More than $17 billion has been wiped from BlackRock’s Russian holdings as big exchange-traded funds hold the sovereign and corporate debt, while Pimco had $1.5 billion of sovereign debt and had sold another $1.1 billion in CDS on Russian debt, according to the Financial Times. Some of that was in the marquee Pimco Income Fund run by managers including Dan Ivascyn.

When it comes to Russia’s pending technical default: “Let’s get clear here, that’s the real issue here,” Bloomberg Intelligence’s Damian Sassower explained for our television audience. “The market is already pricing in a default.”

Banking Exits

Goldman became the first major bank to say it would exit Russia, Bloomberg’s Sridhar Natarajan broke this week. Within hours, JPMorgan told Bloomberg’s Hannah Levitt that it would be “actively unwinding” its business there. Morgan Stanley is considering moving some of its 20 team members from Russia to other big financial centers, people familiar with the matter have said.

As far as cutting back on operations, the headcount in Russia for the three investment banks pales in comparison to Citigroup, where there are some 3,000 employees. While the bank is operating on a more limited basis, Citigroup’s executive vice president of global public affairs has said:

“We are also supporting our corporate clients in Russia, including many American and European multinational corporations who we are helping as they suspend or unwind their business.”

While large corporations like GE and McDonald’s announce exits from the region, financial executives are fielding calls with regulators daily to find a way to safely extricate themselves from trades. According to one expert:

“These financial institutions are literally WhatsApping each other about transactions, which are billions upon billions, going, ‘Do we think this is captured?’ ‘Can we close this out?’ ‘We want to actually get rid of it,’ or ‘We want to freeze it,’ or ‘We want to do something else with it,’” Justine Walker, head of global sanctions and risk at ACAMS, the group for anti-financial crime professionals, told British lawmakers this week.

More on Wall Street

• Bloomberg’s Jenny Surane brings us the details on how a call with Ukrainian President Volodymyr Zelenskiy sparked an exit from Russia for Visa.
• Brett Harrison, the president of FTX.US, spoke to me and Emily Chang about how crypto exchanges are addressing sanctions around the world. He also speaks to how Ukrainians are converting fiat to crypto, “a natural thing to do in a wartime economy.”
• Sixth Street’s Marty Chavez sees the “decentralization of everything.” Yet he explains the risk of stablecoins without regulations, even as the White House issued an executive order that has been hailed as a watershed moment for the crypto industry.
• Goldman says that the risk of a U.S. recession has risen to as high as 35% as growth slows.
• Tiger Global raised $1 billion through a private bond sale via JPMorgan. One expert told Bloomberg that at least a dozen money managers have borrowed money through debt sales -- a pretty rare occurrence.

More to come. I hope you have a restful weekend. I’ll be filling in, co-hosting Bloomberg Television next week from Wednesday through Friday from 2-5 p.m., please join us and send along thoughts, opinions and questions to sbasak7@bloomberg.net.