Russia's possible default seen to have limited impact on Japan

© Kyodo News

Although Russia reportedly made an interest payment to its bondholders to avoid a default last week, it is still facing a high risk of it in the following deadlines amid international sanctions for the country's ongoing aggression on Ukraine.

But market observers say the impact of a possible default is expected to have limited impact on Japanese financial institutions, given their small exposure compared with those of European peers.

Moscow made coupon payments totaling $117 million on two Russian government bonds denominated in dollars on Thursday, a day after the deadline but within a 30-day grace period. But a $447 million payment is due on March 31, followed by another deadline on April 4.

In 2022, Russia still has a total of $4.6 billion in interest and principal to pay, of which $4.14 billion is not allowed to be made in rubles, according to Osamu Tanaka, chief economist at the Dai-ichi Life Research Institute.

Paying for foreign-currency-denominated bonds is becoming increasingly difficult for Russia, as the European Union, the United States and Japan froze about half of the country's foreign currency reserves. Seven Russian banks were also excluded from a key international payment system known as SWIFT.

Financial institutions holding the Russian debt will face losses when they become irrecoverable, but the ramification to the global financial market is likely to be limited in the current situation, with stricter financial regulations than when Russia last defaulted in 1998 and more banks reducing their exposure to Russia since its annexation of Crimea in 2014, Tanaka said.

Japanese firms tend to possess less risky bonds issued by developed countries such as the United States. "The prices of Russian government bonds are so volatile that few Japanese banks hold them directly," said a senior official of a major bank.

A major securities house source said the company holds Russian sovereign bonds as an asset "but it accounts for an extremely small amount of the total and (default) is not something that would directly affect our operation."

The source said retail investors who hold mutual funds investing in Russian government bonds may see a loss, but the overall investment is small and the impact for them is "little or none."

Makoto Takashima, the president of Sumitomo Mitsui Banking Corp. and chairman of the Japanese Bankers Association, said Thursday that Japanese banks may indirectly be affected by incurring losses due to bad loans.

Loans extended by Japanese banks to businesses in Russia totaled $9.56 billion as of September 2021, which was 7.9 percent of the total foreign lending and the fifth-biggest exposure among banks of 24 foreign countries and a region, according to the Bank for International Settlements.

The top lender constituted Italian banks which offered a total of $25.31 billion loan, followed by France's $25.16 billion and Austria's $17.51 billion.

Although BIS data did not include breakdowns of the banks extending loans, megabanks -- MUFG Bank, Sumitomo Mitsui Financial Group and Mizuho Bank -- and government-owned lender Japan Bank for International Cooperation apparently make up most of the Japanese lending, according to each banks' data.

"Considering the strength of the Japanese financial institutions, their management would not be destabilized even if the loans become uncollectible," Dai-ichi's Tanaka said.