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Russian President Vladimir Putin chairs a meeting at the Kremlin in Moscow. (AP/Yonhap News)

Russia’s default on its foreign debt is expected to have a limited impact on the South Korean economy. Korean banks face an estimated US$1.7 billion in potential losses because of the default, which is less than other countries, and those banks reportedly settled some of that debt after the war in Ukraine broke out.

The Bank for International Settlements said Monday that Korean banks had around US$1.7 billion in exposure to Russian debt as of the third quarter of last year. That was lower than France (US$23.6 billion), Italy (US$23.2 billion), Austria (US$17.1 billion) and the US (US$14.7 billion).

Furthermore, Korean banks seem to have lowered their Russian exposure even further since Russia invaded Ukraine in February. “Korean banks closed out a lot of financial transactions with Russia after war broke out. As a result, we won’t face as much direct impact from the Russian default as other countries,” a Korean government official said.

Another factor is that Korea doesn’t conduct a lot of trade with Russia. “Trade with Russia only accounts for 2% of the Korean economy,” an official in the financial world said.

Russia’s default means that Russian government bondholders won’t be able to receive either the interest or the principal on their bonds. Some banks, both in Korea and elsewhere, have apparently taken the precaution of taking out a credit default swap, a derivative that enables recovery of the principal on specific securities in the event of a default.

“Given ongoing speculation about the possibility of a Russian default since the outbreak of the war, most bond purchasers appear to have taken out contracts for credit default swaps,” a government official said.

Credit swap defaults linked to Russia are currently estimated to be worth US$2.5 billion.

Considering that this is a “technical default” — in which Russia has the ability to repay, but can’t transfer the money because of Western sanctions — its actual impact on the domestic and international economy may not be immediately apparent. The default might not have much of an additional impact since Western sanctions have already placed Russia under the economic difficulties that tend to accompany a default, including a downgraded credit rating and limitations on international transactions.

By Jun Seul-gi, staff reporter

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