A Russian default on its debts after western sanctions over its invasion of Ukraine is no longer “improbable”, but would not trigger a global financial crisis, the head of the International Monetary Fund said on Sunday.
The Washington-based fund’s managing director, Kristalina Georgieva, said the sanctions imposed by the United States and other nations were already having a “severe” impact on the Russian economy and would trigger a deep recession there this year. The war in Ukraine will also drive up food and energy prices, leading to hunger in Africa, she added.
Georgieva told CBS’s Face the Nation programme: “In terms of servicing debt obligations, I can say that we no longer think of Russian default as an improbable event. Russia has the money to service its debt, but cannot access it. What I’m more concerned about is that there are consequences that go beyond Ukraine and Russia.”
Last week, the World Bank’s chief economist, Carmen Reinhart, warned that Russia and its ally Belarus were “mightily close” to default.
Asked whether a Russian default could trigger a financial crisis around the world, Georgieva said: “For now, no.” The total exposure of banks to Russia amounted to around $120bn, an amount that while not insignificant, was “not systematically relevant”, she said. Last week, she said the IMF would downgrade its previous forecast for 4.4% global economic growth in 2022 as a result of the war.
Separately, Russia said on Sunday that it was counting on China to help it withstand the blow to its economy from sanctions, but the US has warned Beijing not to provide that support. The Russian finance minister, Anton Siluanov, said Moscow was unable to access $300bn of its $640bn in gold and foreign exchange reserves, but still held part of its reserves in the Chinese currency, the yuan.
“And we see what pressure is being exerted by western countries on China in order to limit mutual trade with China. Of course, there is pressure to limit access to those reserves,” he said.
“But our partnership with China will still allow us to maintain the cooperation that we have achieved, and not only maintain, but also increase it in an environment where western markets are closing.”
Russia is due to make two interest payments on 16 March. However, it will have a 30-day grace period to make the coupon payments.
Siluanov said on Sunday that it would be “absolutely fair” for Russia to make sovereign debt payments in roubles until its foreign exchange reserves were unfrozen, according to Interfax.
The IMF head expressed concern about the spillover effects from the war on the immediate neighbours of Russia and Ukraine because they have close trade relations with both countries, and about the large numbers of of Ukrainians fleeing the conflict, Europe’s biggest refugee crisis since the second world war.
The IMF is also “very worried” about countries that have yet to recover from the Covid-induced economic crisis, which will be hit hard by the surge in wheat and other commodity prices. “For them, this shock is particularly painful,” Georgieva said. Other countries are very dependent on energy imports from Russia.
“Yes, war in Ukraine means hunger in Africa, but war in Ukraine also has social implications for many, many countries through the three channels,” she said. “One, commodity prices, energy, grains, fertilisers, metals … the impact that has on inflation and in countries where inflation has already been high, this is dramatic.” Georgieva gave Brazil and Mexico as examples. Surging inflation will force the authorities to tighten financial conditions, bringing further hardship to people.
However, economic growth remains robust in countries like the US that have been quick to recover from the pandemic, she told CBS.