Western curbs give Moscow rational default card

Western leaders are giving Vladimir Putin a rational default card. Sanctions give the Russian president more reason to renege on at least some of his $200 billion of sovereign debt. The fallout could leave creditors stuck for years.

Judging by its balance sheet, Russia isn't an obvious default candidate. When the country last reneged in 1998, its borrowings exceeded 130% of annual output. Last year they were less than 20%, only a fifth of which was in foreign currency. That gives Putin a cushion to cope with a collapsing currency and shrinking economy. The spiking crude price will also help his finances. Last year, Russia needed an oil price of $69 a barrel to balance its budget, S&P reckons, just over half the current level.

Yet sanctions make a default quite likely. The United States and Europe have both imposed curbs on banks and companies dealing with the Russian central bank and ministry of finance. That could make it hard to get interest payments to foreign bondholders, even if Russia wants to pay.

But Putin has plenty of his own reasons not to pay, especially when it comes to his $39 billion of foreign currency sovereign debt. With many Russian banks cut off from cross-border payments systems and unable to deal with Western lenders, he may not want to waste precious dollars on Western creditors. The West's decision to limit Moscow's access to its $630 billion of foreign exchange reserves means there is less basis to fear vulture funds grabbing collateral. And with multinationals pulling out of Russia, the reputational damage that comes with default is beside the point.

Such a move could still be messy. Moscow could restrict cross-border repayments to sovereign creditors. But a blanket ban might also affect large companies that have not yet been sanctioned, leaving them at creditors' mercy. Citigroup reckons Russian corporates have $96 billion of foreign currency debt outstanding.

Russia's debt traded at around 20% of face value after the country defaulted in 1998. But the economy bounced back quickly. This time, creditors may not get their debt restructured for years. Moscow would face a lengthy standoff with the West, while sanctions cause its economy to shrink and a delay to vital reforms to wean it off oil. Russian bonds due in 2023 were quoted as low as 25% of face value on Wednesday. That may be optimistic.