Russia is at increasing risk of a full-blown financial crisis as the West tightens sanctions and Russian meddling in Ukraine pushes the region towards conflagration.

The country’s private companies have been shut out of global capital markets almost entirely since the crisis erupted, causing a serious credit crunch and raising concerns that firms may not be able to refinace debt without Russian state support.

“No Eurobonds have been rolled over for six weeks. This cannot continue for long and is becoming a massive issue,” said an official from a major Russian bank. “Companies have to roll over $10bn a month and nothing is moving. The markets have been remarkably relaxed about this, given how dangerous it is. Russia’s greatest vulnerability is the bond market,” he said.

Lars Christensen from Danske Bank said Russia’s economy is already in recession and may contract by as much as 4pc if there are fresh sanctions, risking a repeat of events in 2008 when capital flight set off serial defaults and a banking crisis. “There is a credit squeeze under way and a significant shock to the cost of capital. This could prove to be as bad as the Lehman crisis for Russia. Capital outflows have already been $65bn so far this year, compared to $135bn in late 2008,” he said.

“Markets seem to be betting that the Kremlin can’t let things get worse in Ukraine because it would be insane, yet it is happening anyway. We think there will be a much more serious correction in the Russian markets,” he said.

David Fuller's view

Vladimir Putin projects the image of a macho online game show action man, but this article cites Russia’s financial vulnerabilities which his aggression is rapidly compounding.  Putin is gambling that Germany and the rest of the EU will blink first on the crucial sanctions issue.

They could, because the EU’s economies are only just recovering.  Moreover, the region remains dependent on Russia for approximately 30% of its natural gas.  However, German Chancellor Angela Merkel, having grown up in the former East Germany before the Soviet Union collapsed, knows more about the dangers of Putin’s territorial ambitions than any other EU leader.  

Moreover, Western companies have already gone well beyond government sanctions by prudently delaying further investments and trade deals with Russia while diplomatic tensions persist.

Several people have recently asked me if they should invest in Russia, where the RTSI$ Index currently has a trailing PER of 5.48 and Yield of 4.29%.  My answer: yes it is cheap but justifiably so.  I would not consider investing in Russia until the day after Putin is no longer in charge.

Meanwhile, global investors have largely shrugged off potentially serious conflicts in various parts of the world over the last five years, not least because monetary tailwinds from developed countries have been so powerful.  They remain a positive factor but if the influential US stock market is no longer on a one-way upside trajectory, problems in Eastern Europe are less likely to be entirely ignored by investors.