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It has been just over a week since the geopolitical tensions reached their pinpoint, yet there is still no light at the end of the tunnel. The second round of talks between Russia and Ukraine ended in Belovezhskaya Pushcha in Belarus. The parties agreed to organize humanitarian corridors for the evacuation of civilians and delivery of medical supplies to the sites of fighting.
As stated in the joint communiqué after the talks, the possibility of “a temporary ceasefire during the period when the evacuation is being carried out, in the sectors where it is taking place” is envisaged. Medinski, an advisor to Russian President Vladimir Putin, noted that during the dialogue the parties discussed three sets of issues: military, international humanitarian, and that of the future political settlement of the conflict. Medinsky also said that the third round of talks would take place in the near future.
Meanwhile, the international rating agency S&P downgraded Russia’s long-term foreign currency sovereign credit rating from “BB+” to “CCC-” and its long-term local currency rating from “BBB-” to “CCC-” (real possibility of default). The ratings are placed on CreditWatch, meaning under review, with a negative outlook.
S&P analysts noted that the new anti-Russian sanctions have halved Russia’s available foreign currency reserves, including foreign currency deposits and securities registered in the U.S., EU and Japan. The reduction in Russia’s foreign exchange reserves has weakened its foreign liquidity at a time of increased demand for foreign exchange. Capital controls imply a ban on cross-border financial flows, including debt service payments from both the private and public sectors. This is likely to limit the ability of non-resident holders of domestic and foreign currency bonds to receive timely interest and/or principal payments.
It is feared that the sanctions imposed by Russia have greatly increased the likelihood that the country will default on its dollar and other public debts in the international market. Russia is due to redeem more than $700 million in government bonds this month. Although in theory, it has sufficient reserves to cover the debt, in practice the freeze on some assets and other measures could affect its solvency. JPMorgan analysts say the first crucial date is March 16, when two coupon payments on the bonds are due, although, like most Russian debt, they have a built-in 30-day “grace period” that would delay any formal moment of default until April 15.
Another issue we see fit to mention is that the London Stock Exchange announced the suspension of trading in the securities of 27 companies whose business is closely linked to Russia. To be more precise, these are the so-called ADRs (American Depositary Receipts) and GDRs (Global Depositary Receipts). These securities register the right to own directly the shares of Russian issuers. The good news is that the closure of trading in Russian securities on the London Stock Exchange will stop the spontaneous process of devaluation of Russian securities and will probably dissuade investors from taking hasty actions in a panic. However, there is still no talk of delisting.
