Russia 'extremely likely' to default on debts if Ukraine crisis worsens: IIF

Russia is extremely likely to default on its external debts and its economy will suffer a double digit contraction this year after the West launched sanctions unprecedented in their scale and coordination, the Institute of International Finance said on Monday.

The IIF estimates that half of the foreign reserves of the central bank, which on Monday hiked interest rates and introduced some capital controls, are held in countries which have imposed asset freezes, severely shrinking the firepower policymakers have to support the Russian economy.

The central bank would prioritise the protection of domestic savers with foreign investors "one of the last on the list".


"If we stay here and this (the crisis) escalates, then default and restructuring is likely," Elina Ribakova, the IIF's deputy chief economist told reporters during a media call. She said default would be "extremely likely", although the relatively small size of foreign holdings -- at around $60 billion -- of Russian debt would limit the fallout.

Russia last week invaded Ukraine, leading the West to impose a series of sanctions. These have included the freezing of the central bank's assets, removal of many Russian banks from the global payments system SWIFT and the blacklisting of individuals and entities. Russia calls its actions in Ukraine a "special operation."

The IIF's Ribakova said the sanctions, which could yet be toughened even further, were "the most severe economic sanctions imposed on a country" ever and would send the Russian economy into a tailspin, with a low double-digit contraction this year likely and inflation soaring by a double digit amount too.

She said conversion of Russian domestic foreign exchange holdings into roubles was also on the table, although the central bank would be reluctant to deploy that initially as it tried to spare hurting domestic savers.