Following Russia’s military invasion of Ukraine last week, international markets have witnessed a rapid spike in volatility, with CDS spreads of both countries rising dramatically as investors globally recalibrate risk outlooks for both nations.

Last week S&P downgraded ratings for both countries in the wake of the war, with Ukraine lowering from B to B-, and Russia sinking below investment grade from BBB- to BB+. On March 3rd, Moody’s and Fitch agencies downgraded Russia’s sovereign rating to the ‘Junk’ category, after a host of sanctions on the nation were imposed by the U.S. and the European union.

Global sanctions are expected to increasingly impact fixed income markets, particularly for Russia, as investors digest and reassess developments. The U.S. has placed sanctions to sever connections with major Russian banks representing approximately 80% of banking assets in Russia while imposing new debt and equity restrictions on major Russian state-owned entities. The U.S. initiated restrictions on Russian elites and their family members. The U.S. has also prohibited investors from purchasing Russian government bonds sold after 1st March in the secondary market. Russia’s military and defense ministry is now being restricted from purchasing almost all U.S. products and items produced in foreign nations using U.S.-origin software, technology, or equipment.

Globally, the response has been coordinated with the U.S. and the European Union barring several Russian banks, Russian Government, and the Russian Sovereign Wealth Fund from the SWIFT payment system. The U.S., U.K., European Union, Japan, Canada, and many other countries rolled out a slate of measures against Russia and many of its largest banks in an attempt to isolate Moscow from the global economy. Sanctions on defense, maritime technology and aviation have also been enforced to block Moscow’s import of tech goods and restricted air space. Another major sanction in place includes licensing exemptions for nations adopting export restrictions on Russia.

Russia and Ukraine’s equity and bond markets have witnessed serious implications. Prior to the intensification of issues in November of last year, bonds of these nations were being traded near par, and currently, these are being quoted at a severe discount, making these bonds the top losers of the new year. On Monday (28th February), Russia’s dollar-denominated bonds dropped, with its $7 billion bond (maturing in 2047), declining in price to 33 cents on the dollar, marking high levels of distress. Ukraine’s government and currency bonds crashed violently, with investors wary of the country’s ability to avoid another sovereign default.

CDS spreads for Russian sovereign risk soared dramatically over the past month, with the 10-year CDS rising 59% from 254bps on 1/31/2022 to 404bps as on 02/28/2022, while the 5-year CDS increased 158% from 224bps to 579bps over the same period. The extraordinary spike was particularly severe the day Russia began its invasion of Ukraine with the 5-year CDS spiking to 894bps on 2/24/2002.