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A possible Russian debt default is unlikely to cause a global financial earthquake | Nils Pratley

A possible Russian debt default is unlikely to cause a global financial earthquake |  Nils Pratley

 


A Russian debt default, the first phase of which could reach as soon as this week, looks, in theory, like a major financial event. After all, the last time Russia faltered—in fact, the only other time since the Bolshevik Revolution more than a century ago—was 1998 and chaos was a real possibility.

Long-Term Capital Management, a huge and already struggling hedge fund, couldn’t handle the explosion in volatility and a general flight to safety in the financial markets. Within a few weeks, the US Federal Reserve had to bolster 14 Wall Street banks to agree to a $3.6 billion LTCM bailout to prevent a broader meltdown. Perhaps the Fed was right to fear contagion: LTCM was absurdly overextended by leverage, and half of Wall Street was too stretched.

Fortunately, similar excitement should not follow if Russia goes ahead with its threat-based warning to pay the ruble to investors from “hostile” countries when it drops a $117 million coupon on a dollar-denominated sovereign bond maturing on Wednesday. Experts agree that such a measure would be a clear default: if the bonds select a payment currency, as they seem to do on this occasion, you cannot choose another. Once the 30-day grace period expires, the default becomes official.

But from an infection perspective, size is the most important factor. Thinktank Capital Economics calculates that the total volume of Russian sovereign debt in foreign currency held by non-residents does not exceed $20 billion, which is not much in the global context. Even if one adds potential foreign defaults on domestic bonds, one only gets $70 billion. Argentina defaulted a little more in 2020 and didn’t cause a global financial earthquake.

There are two potential risks around the generally relaxed view, Capital Economics adds, and neither can be ignored. First, a single bank or significant institution could have significant exposure to Russian sovereign bonds. Yes, concentration of risk is also important. It’s a close cousin to correlative risk, which is what caused the downfall of LTCM.

Second, the risks will become even more serious if major Russian companies, such as Gazprom and Rosneft, start to default. The think tank says their foreign debt is about four times greater than the sovereign’s.

So far, there is no sign of companies defaulting, but a possible next step should be by Moscow as the impact of sanctions continues and a large part of foreign reserves appear frozen. But we’re not there yet, and lenders can’t claim there’s no time to prepare.

The future of Japan Tobacco in Russia

British American Tobacco (BAT) last Friday reversed its decision to continue selling cigarettes and other nicotine products in Russia. This leaves Japan Tobacco International (JTI), whose brands include Camel, Winston, Silk Cut and Benson & Hedges, the main position among the major Western tobacco companies.

Japan Tobacco’s position is similar to that taken by BAT initially before being abandoned two days later. The Tokyo-based group said last Thursday that its subsidiary JTI would suspend new investment and marketing, but would continue production and distribution in Russia. Its market-leading Russian operation is large: four factories and 4,000 employees.

However, there was a hint that the company was not entirely confident of sticking with Russia. “JTI cannot rule out the possibility of suspending manufacturing operations in the country,” the statement continued.

So far, however, the manufacturing suspension has not occurred, despite an enthusiastic call by JTI employees in Ukraine for a stronger response. “Please don’t make us feel ashamed for being a part of the JTI One team,” an open letter begged two weeks ago.

The moral argument for tobacco companies leaving Russia is certainly more compelling than in almost any other industry. Cigarettes are virtually the definition of an unnecessary consumer and excise duties go directly to the Kremlin coffers. After the BAT turn, JTI’s stance seems unacceptable. what are you waiting for?

The suits follow the cakes out of the blowing basket

Nobles at the Office for National Statistics, presumably wearing bleak “smart dividers,” declared that the men’s suit was no longer an appropriate product to help measure inflation. Oddly enough, the cake also got the piece from the basket of representative goods; Apparently, we’re fed multiple boxes of cake these days.

The death of the donut isn’t a huge loss, but it’s hard to believe the men’s suit will go without a fight once the effects of working from home wear off. Think of the lawsuit’s return to the ONS basket as an unofficial sign of the economy’s recovery to normal after Covid. Again in 18 months is the expectation here.

Sources

1/ https://Google.com/

2/ https://www.theguardian.com/business/nils-pratley-on-finance/2022/mar/14/probable-russian-debt-default-unlikely-to-cause-a-global-financial-earthquake

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