What are the implications for the debt market?

An increasingly isolated and belligerent president, Vladimir Putin (according to outside reports) has embarked on a much deeper foray that certainly seems if regime change could be his end goal, or certainly the leverage point of an exit strategy.

Surprising to many observers, this prompted a much more determined response from the international community.

There was certainly a logic, from the Russian point of view, in seeking to protect a buffer zone between it and the eastern borders of the NATO-alliance.

However, assumptions about venality and decadence in the West, and confusing a desire for peace with weakness, rather than deep support for democracy, may have drawn premature conclusions about the potential for rapid strategy execution.

In Ukraine itself, President Volodymyr Zelenskyy, an unorthodox foreigner who had previously voted low, found his footing and rose to the occasion, rallying the nation and the support of international partners.

This energized the population as we saw a robust defense in the early stages of the invasion.

In addition, the scale of Russian action has disrupted the security architecture that has prevailed in Europe since the end of the Cold War, and the strategy could be seen in the context of the emergence of a new Eurasian axis. involving China.

The shock of this situation, particularly in Europe, has led to a deeper response, which should have lasting effects on defense spending, the decision to join Europe or NATO and energy security, between others.

Digital edition of Investment Week – March 7, 2022

Far-reaching sanctions have crossed previous red lines.

The suspension of the Nord-stream 2 gas pipeline to Germany was previously and should be resisted again.

The decision to ban certain financial institutions from the secure messaging system for international payments SWIFT has also been the subject of resistance.

And finally, the actions targeting the Russian central bank are of particular importance – aimed at preventing the bank from using its “fortress” balance sheet and vast foreign exchange reserves to undermine the sanctions regime.

This will put significant pressure on the Russian economy, and while China may provide a path of support, China is currently expected to play a long game, and its support will be conditioned by its own geopolitical considerations and likely conditioned by the extraction of value. of the difficult situation in Russia.

In the context of bond markets, our research focuses on understanding and monitoring specific sanctions for direct first-round effects.

The ineligibility of new sovereign issues for purchase abroad, the freezing of Russia’s large stock of foreign currency assets, and the implications for Russia’s macroeconomic stability given inflationary concerns and the risk of default are all short-term considerations.

The effects on Ukraine’s debt and default probabilities, as well as the potential impact on other Central European countries will be in focus as the situation evolves.

Second-round implications on emerging market debt indices will also be considered, along with additional measures for companies, institutions and individuals with respect to effects on corporate debt, equities and macroeconomic stability. wider.

MSCI ESG Research downgrades Russia to lowest

As we move forward, some of the most lasting and wide-ranging repercussions will be felt – the increase in state defense spending in Europe – the change in international relations and all the relevant consequences.

For now, the focus is on what we know and expect to see in the days and weeks ahead.

There is potential for additional and tougher sanctions given the scale of the Russian incursion.

We could also see broader macroeconomic implications for Russia, including restrictions on trading new sovereign bonds issued in Russia.

Morningstar will closely monitor the impact of the restrictions on the Russian central bank’s ability to stabilize the currency and manage inflation.

Likewise, the impact of the European debt market, as importers of natural gas from Russia.

We will monitor the uncertainties that the conflict will bring and update our analysis according to developments.

Edward Fane is Head of Research, EMEA, at Morningstar Investment Management

Tana T. Thorsen