Russian sovereign debt market ‘is now effectively non-tradable’, says IIF economist

Elina Ribakova, deputy chief economist at the Institute of International Finance, speaks with Yahoo Finance Live to discuss the impacts Russia sanctions could have on Russian debt markets, sovereign debt holdings and the state of central banks in currency trading.

Video transcript

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Well, as we continue to cover the Russian invasion of Ukraine, we turn to the impact that US government sanctions could have on Russia’s sovereign debt. So to find out more, we welcome Alina Ribakova, Deputy Chief Economist of the Institute of International Finance. Alina, thank you very much for being on our show. And I just wanted to kick off this question by asking about some eye-catching headlines we’ve seen about some banks taking margin calls on Russian debt exposure. Have you ever seen in the first few days a rather sharp drop in the Russian sovereign debt market?

ALINA RIBAKOVA: Absoutely. I think the sovereign debt market is now effectively non-tradable. Liquidity is very low even if the sanctions on the secondary market relate only to new public debt. But of course, the current holders of the outstanding public debt are struggling to get by.

So, it definitely has a huge impact on the market. This has an impact on the ruble, on CDS, and of course on the government [? bond ?] yields.

Yeah, can you explain CDS a bit more because that was something a lot of people were watching in the immediate hours of the invasion here? How important is exposure not just to those invested in emerging markets? But is there some kind of international financial risk that could result in terms of financial stability? Or is it content enough?

ALINA RIBAKOVA: Well, I think at this point it’s pretty contained. We have been preparing for some time for sovereign debt sanctions should the Russian authorities step up their efforts. And we have already seen sanctions in the primary market.

You may recall that last year and a few years ago foreign institutions, US institutions, were already barred from participating in the primary market. So since then they have been wondering if they could actually get access to Russian government bonds. CDS is an instrument that helps you hedge risk. So, for example, we might find it difficult to get out of a less liquid instrument, for example, Russian [INAUDIBLE], the Russian local government bond market, or the external bond market, or maybe even stocks. CDS is a little easier to use to hedge your exposure to Russia.

Alina, I want to pick up on the first point you raised about the impact we’re already seeing. What does this suggest about the effectiveness of Russia’s sovereign debt sanction? On a second question here, if Russia is unable to raise debt in the West, does that push the country even further towards a country like China?

ALINA RIBAKOVA: So I think it’s important to consider that this is a complete set. If we had been in an environment where there is only sovereign debt and where the conflict is contained and where we could move forward with these negotiations, that would be a scenario. We’re in the scenario right now where, as the administration has made very clear, it’s sort of all the countries coming together to put in place the sanctions and the potential – and there’s room for more.

Thus, not only sanctions on sovereign debt, but also the authorities sanction systemically important banks in Russia. There is room to do more. But I think it’s kind of all put together that has an impact.

In terms of sovereign debt in Russia, they are currently in surplus. Probably after these shocks, they will have to go into a small deficit. But they have sufficient capacity to rely on the national financial system to finance themselves and contract new debts. At the same time, they also have around 630 billion in reserves. And they can use some of it because it’s a wealth fund saved for rainy days if they need to finance their budget deficit.

Alina, I want to focus on the Russian central bank. They had made a lot of effort in the years leading up to COVID to de-dollarize. They really increased their exposure to gold, reduced their exposure to US dollar denominated assets. I mean, how important is this in the SWIFT debate and whether or not it would be useful to remove Russia from this communication channel?

ALINA RIBAKOVA: Well, certainly. As you say, they prepared. They kind of tried to keep a fortress, a rational strategy. They completely turned around after 2014.

But they are not prepared for this kind of sanctions. We live in the new reality, as you just mentioned yourself. We are talking about SWIFT. We discuss the potential addition of all Russian systemic banks to the total exclusion of the global financial industry.

And of course there are energy sanctions that we may want to talk about later. But yes, so they are prepared. They have a lot. About 20% of their reserves are in gold, and that’s onshore in Russia.

They hold next to nothing in terms of US Treasuries because they were prepared. They hold very little in the jurisdictions of the United States or European countries because they were afraid of sanctions. I think even central bank sanctions might not be out of place.

SWIFT is a global payment messaging system. It doesn’t really work out. But it helps us communicate with each other. How do the payments go?

I think the risks that potential European partners have particularly pointed out are that it would also shut down trade and all communications with Russia. And that could have spillover effects on international markets and potentially on the economy. And I think that’s why the global community has been cautious about SWIFT.

And, Alina, finally, here I want to emphasize that you wear Ukrainian colors and have family there. Just a little curious on a human level, I mean, what do you hear on the ground there? Many people obviously trying to flee the capital, are fleeing the country. What’s going on from what you hear?

ALINA RIBAKOVA: It is an absolute tragedy, and it is a tragedy for the Ukrainian people. And it is also tragic for anyone coming from the wider region, including Russia itself. So we really appreciate your support, and we hope the international community will continue to support Ukraine and provide more support.

Well, certainly keeping your family in our thoughts, Alina, enjoy the weather today. Alina Ribokova, Deputy Chief Economist of the Institute of International Finance.

Tana T. Thorsen