Russia’s economy is fraying, its currency has collapsed, and its debt is junk. Next up is a potential default that could cost investors billions and shut the country out of most funding markets.

Warning lights are flashing as the government kickstarts the process of paying $117 million in interest on dollar bonds Wednesday, a key moment for debt holders who’ve already seen the value of their investments plunge since Russia invaded Ukraine last month.

The government says that all debt will be serviced, though it will happen in rubles as long as sanctions — imposed because of the war — don’t allow dollar settlements. Failure to pay, or paying in local currency instead of dollars, would start the clock ticking on a potential wave of defaults on about $150 billion in foreign-currency debt owed by both the government and Russian companies including Gazprom, Lukoil and Sberbank.

Such an event will revive memories of previous crises, including Russia in 1998, when it defaulted on some ruble-denominated debt, and Argentina three years later.

Signs of looming financial damage are becoming apparent at many of the world's biggest money managers, including BlackRock Inc. and Pacific Investment Management Co. But it’s not likely to be limited to these giant funds. Because much of Russia’s debt was rated investment grade just weeks ago, the securities were pervasive across global fixed-income portfolios and benchmarks, meaning the impact could ripple across pension funds, endowments and foundations.

“This will be a monumental default,” said Jonathan Prin, a portfolio manager at Greylock Capital Associates. “In dollar terms, it will be the most impactful emerging-market default since Argentina’s. In terms of broader market impact, it’s probably the most broadly felt emerging-market default since Russia itself in 1998.”

Russia is already a commercial pariah, crippled by sanctions and the exodus of foreign firms such as Coca-Cola Co. and Volkswagen AG since the war started. The government has responded with capital controls, restricting outflows of money to protect the economy and the ruble.

Businesses and households are facing a double-digit economic slump and inflation accelerating toward 20%. About half of the country’s foreign-exchange reserves — some $300 billion — have been frozen, according to the finance minister. Regardless of the Kremlin's policy on foreign debt payments, companies will find it harder to service their obligations as falling demand hits sales and profits.

Because of the sanctions, and various decrees Russia introduced in response, a default appears all-but inevitable. Swaps markets put about a 70% chance on it happening this year. Fitch Ratings says it’s “imminent.” Indicative pricing on the country’s bonds values some of them near 20 cents on the dollar. Just days before the invasion, those same notes traded above par.

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