By Andrea Shalal

WASHINGTON, (Reuters) – Russia and Belarus may soon default due to the severe sanctions imposed by the United States on their economies over the conflict in Ukraine. Carmen Reinhart from the World Bank, chief economist for the World Bank, stated that the US and allies have placed massive sanctions against the countries.

Russia’s default on $40 billion in external bonds is a very real possibility. This would be Russia’s first serious default since after the revolution of 1917 Bolshevik.

Reinhart stated that both Russia and Belarus were in “square default territory”. They are not yet rated as selective defaults by agencies, but they’re very close.”

Fitch lowered Russia’s sovereign rating to “C”, from “B” on Tuesday. This was in response to trade and sanctions that have weakened Russia’s willingness to pay its debts.

Reinhart stated that although financial sector consequences have been minimal so far, there could be risks if European financial institutions are more exposed than they think to Russian debt.

Foreign investors hold around half of Russia’s hard-currency sovereign bonds. Moscow has to make $107million in coupon payments for two bonds due March 16th. Russian corporations hold just $100 billion of outstanding international bonds.

According to the Bank of International Settlements, foreign banks are exposed to Russia for just $121 billion. Most of this exposure is concentrated with European lenders.

Reinhart explained, “I worry over what I do see.” Reinhart stated, “Financial institutions have high capital but their balance sheets can be opaque. Russian defaults in the private sector are another issue. It is not possible to remain complacent.

After the 2014 annexation and reorganization of Crimea by China, China has also expanded rapidly its Russian lending.

UKRAINE’S DIFFICULT SITUATION

Analysts predict that Ukraine will need to get debt relief in the coming year due to its large war outlays, and its heavy debt load of $94.7 billion by 2021. However, the country has already pledged to pay its entire debt off on its own.

Reinhart indicated that it was realistic to anticipate Ukraine seeking cash-flow relief. She also expressed optimism about the willingness of creditors to be responsive given the present situation. Reinhart said Ukraine might also miss a forthcoming coupon payment. This would not affect its credit rating.

She stated that Ukraine has, and will continue to have, open doors despite its extremely difficult financial position. “You’re not declared in default as long as you’re still within the grace period.”

Experts say that Ukraine’s sovereign debt amounts to $1.6 billion due to Paris Club creditors. $4.9 Billion is owed non-Paris Club creditors. Most of the debt is currently held by China.