Russian sovereign debt market ‘is now effectively untradeable’: IIF economist

Elina Ribakova, the Institute of International Finance Deputy Chief Economist, sits down with Yahoo Finance…

Elina Ribakova, the Institute of International Finance Deputy Chief Economist, sits down with Yahoo Finance Live to discuss the impacts sanctions on Russia may have on Russian debt markets, sovereign debt holdings, and the state of central banks in currency exchanges.

Video Transcript

[MUSIC PLAYING]

Well, as we continue to cover the Russian invasion of Ukraine, we turn our heads to the impact of the sanctions handed out by the United States government might have on Russia’s sovereign debt. So for more on this, we welcome in Alina Ribakova, Institute of International Finance deputy chief economist. Alina, thank you so much for hopping on our show. And I just wanted to kick off this question by asking about some eye-popping headlines that we had seen about some banks taking margin calls on Russian debt exposure. Have you seen already just in the first few days a pretty sharp falling out in the Russian sovereign debt market?

ALINA RIBAKOVA: Absolutely. I think the sovereign debt market is now effectively untradable. The liquidity is very low even though the sanctions on the secondary market are only on the new government debt. But of course existing holders of the outstanding government debt are struggling to get out.

So it’s definitely having a massive impact on the market. It’s having an impact on ruble, on CDS, and of course the government [? bond ?] yields.

Yeah, can you explain a little bit more about the CDS because that was something that a lot of people were watching in the immediate hours of the invasion here? How significant of an exposure is that to not just those that are invested in emerging markets? But is there any sort of international finance risk that could come of this in terms of financial stability? Or is it pretty contained?

ALINA RIBAKOVA: Well, I think at this stage it’s pretty contained. We have been preparing for sovereign debt sanctions should Russian authorities escalate for a while now. And we have already seen sanctions on the primary market.

You might remember last year and some years ago where the foreign institutions, the US institutions, cannot participate in the primary market already. So since then, they have been thinking whether they’d be able to actually have any access to the government bond of Russia. CDS is an instrument that helps you hedge risk. So for example, we might have difficulty exiting an instrument that is less liquid– for example, Russian [INAUDIBLE], Russian local government bond market, or external bond market, or maybe even equities. CDS is somewhat easier to use to hedge your exposure to Russia.

Alina, I want to go back to the first point that you made there about the impact we’re already seeing. What does that suggest about the effectiveness of sanctioning sovereign debt for Russia? On a second question here, if Russia is unable to raise debt in the West, does that push the country even more towards a country like China?

ALINA RIBAKOVA: So I think it’s important to look at it that it’s a whole package. If we would have been in the environment where it’s just sovereign debt and the conflict is contained and we can move forward to those negotiations, that would be one scenario. We are right now in the scenario where, as the administration has very clearly said, it’s sort of all the countries are coming together putting the sanctions and potential– and there is room for more.

So not only sovereign debt sanctions sanctions, but also the authorities are sanctioning systemically important banks in Russia. There is room to do more. But I think it’s sort of everything put together that’s having an impact.

In terms of sovereign debt in Russia, they’re right now in surplus. Probably after these shocks, they will have to go in a small deficit. But they have enough ability to lean onto domestic financial system in order to finance themselves and get new debt. At the same time, they also have about 630 billion in reserves. And they can use some of that because it’s a wealth fund saved for the rainy day should they need to finance their budget deficit.

Alina, I want to focus on the Russian central bank. They had made a lot of efforts in the years leading up to COVID to de-dollarize. They really beefed up their exposure to gold, reduced their exposure to US dollar, denominated assets. I mean, how important is that when it comes to the debate about SWIFT and whether or not it would be helpful to take Russia out of that comms channel?

ALINA RIBAKOVA: Well, definitely. As you say, they have prepared. They’ve sort of tried to keep a fortress, rational strategy. They turned around completely after 2014.

But they are not prepared for these kind of sanctions. We’re living in the new reality, as you just mentioned yourself. We’re discussing SWIFT. We’re discussing adding potentially all Russia systemic banks to the full exclusion from the global financial industry.

And of course, there are energy sanctions which we might want to touch upon later. But so yeah, so they’re prepared. They have a lot. About 20% of their reserves holdings are in gold, and it’s onshore in Russia.

They hold almost nothing in terms of the US treasuries because they were prepared. They hold very little in the US or European countries’ jurisdictions because they were afraid of sanctions. I think that sanctions even on the central bank might not be off the table.

SWIFT is a global payments messaging system. It doesn’t really settle. But it helps us communicate with each other. What are the payments going through?

I think the risks that potentially European partners were particularly pointing out is that it would also halt trade and all communications with Russia. And that might have spillover on international markets and potentially the economy. And I think that’s why the global community has been cautious about SWIFT.

And, Alina, lastly here I want to acknowledge that you are wearing the Ukrainian colors, and you do have family that’s over there. Just kind of curious at a human level, I mean, what are you hearing on the ground there? A lot of people obviously trying to flee the capital, flee the country. What’s going on based off of what you’re hearing?

ALINA RIBAKOVA: It is absolute tragedy, and it’s tragedy for Ukrainian people. And it’s also tragic for everybody who is from the region more broadly including from Russia itself. So we really appreciate your support, and we hope that the international community will continue to stand by Ukraine and will provide more support.

Well, certainly keeping your family in our thoughts, Alina, appreciate the time today. Alina Ribokova, Institute of international Finance deputy chief economist.