How To Protect Yourself From A Possible Recession

You may soon start hearing pundits talk about the dreaded term “recession.” It’s one of those words used by finance people that comes across as ominous and foreboding. When people discuss recessionary times, it conjures up fears of long lines at the gas station, a fading economy, high inflation, job losses and general malaise.

A recession is a decline in GDP for two or more consecutive quarters. Although it’s not a perfect science, there is an old joke about economists who often get things wrong— “He’s predicted nine of the past five recessions”—implying the prognosticator is merely guessing and missing the mark on too many occasions to be taken seriously.

The Signs Of An Upcoming Recession

The United States is starting to see some of the warning signs of a recession. When the stock market plummets by 20%, it’s called a “bear market” and the massive losses contribute to a recession, as people lose faith in the economy and curtail expenditures. When people invest in the market and realize substantial profits, there is a wealth effect created. The windfall from investing emboldens people to spend more money, as they are confident that the good times will last forever.

When dramatic declines in stocks, bonds and cryptocurrencies happen, it has the opposite effect. Fear and panic take hold. Risk-taking is over and people go into survival mode, ruthlessly curtailing expenses.

Another factor for a recession is that inflation is raging to 40-year highs, further causing Americans to lose confidence. To pour more cold water on the economy and stock market, the Federal Reserve plans on continuing to raise interest rates. There is a fear that all of the strides the U.S. has made since the economy reopened will evaporate.

Many, if not all, of the stock gains from the meme subreddit Wallstreetbets crowd over the last year have already been lost. The same holds true for other investors too. If you have a company-sponsored 401(k) plan or IRA account, don’t look at the statements, as it will ruin your day.

Deutsche Bank economists wrote in a report to clients last month, “We will get a major recession,” becoming the first major bank to bearishly predict a U.S. recession. Bank of America has publicly stated that the mood in financial markets has been “recessionary.” Goldman Sachs said the tight labor market has “has caused a meaningful increase in the risk of recession.”

What Happens In A Recession

Recessions are usually characterized by job losses. You may think to yourself that is not indicative of the current labor market. Within the past year, the job market has seen a robust recovery. Last Friday, the U.S. Department of Labor reported that 428,000 jobs were added in April, with the unemployment rate remaining steady at 3.6%.

Job openings hit a record 11.5 million in March. That same month, a historic 4.5 million people quit their jobs, showing that Americans feel confident enough to quit their positions, as they believe there are plenty of other opportunities available.

Nevertheless, depending upon how things progress, there could be further downsizings in other industries, as the U.S. has seen in the tech sector. As there has been so much hiring due to the buoyant economy, it could turn out the executives were too optimistic and now need to trim the staff.

Concerns over a slowing economy could take the steam out of the venture capital engines that have been producing numerous unicorn startups. The unprofitable outfits may not gain further funding and resort to layoffs.

What happens is that the U.S. could enter a situation in which things spiral downward. Rapidly rising unemployment is also another driver of a recession. As more people lose their jobs and business conditions deteriorate, those who find themselves in between roles will find it harder and take longer to procure a new role.

Fear Takes Over

It’s almost a self-fulfilling prophecy. Fear of a recession prompts businesses to cut costs to conserve financial assets. They want to have the cash to get through the rough patches. The aggressive cost-cutting measures usually include pay cuts and job losses. Unfortunately, this is a common occurrence. The economy goes through these boom-and-bust cycles fairly regularly. For many people, there are not many other choices than to hunker down and ride it out until better times arrive.

There is a behavioral component too. As there is an eroding level of confidence in the economic and financial system, demand for goods and services declines. There comes a point in which the business cycle reverses course, due to the toxic confluence of rising inflation, loss of faith, joblessness, plunging stock market and housing prices, followed by a fear of further losses, making the economy contract.

How To Get Through A Recession

Now is the time to hyperfocus on your job and career. Make sure your position is secure. Lock in any verbal agreements for a raise, promotion and bonus. It will be awkward and uncomfortable, but ask your boss about how stable the company is and where you fit in. Ask them if they view you as irreplaceable and a future rising star.

If the answers are not to your liking, don’t sulk. Take action. Immediately go into job-hunt mode. Get in touch with top recruiters in your space. Speak with career coaches and résumé writers. Start networking on LinkedIn. Now is not the time to be shy. Push yourself to ask everyone in your network for job leads and introductions.

If you lose your job, make sure you put money aside to get through the time between now and when you secure another position. Keep expenditures down and pay down your credit card and other balances that charge ludicrously high interest rates. Switch investments from risky assets to something more secure or dividend-paying.

Consider going back to school to learn a new profession that is marketable and pays well. This is what happened after the dot-com bubble burst, the financial crisis and the beginning of the pandemic. People took shelter, not only at home, but in colleges, MBA programs and law school.

They used the economic downturn to learn and earn more, once they’ve finished their education. You could also take on gig work, start a side hustle or pivot toward starting a business. Use the time wisely to reevaluate what you really want to do with your work-life.

I am a CEO, founder, and executive recruiter at one of the oldest and largest global search firms in my area of expertise

Source: Don’t Panic: How To Protect Yourself From A Possible Recession

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Will Inflation And The Stock Market Conspire To Kill The 4% Rule?

1-23-1

A recent WSJ headline sent chills down the backs of every retiree—”Cut Your Retirement Spending Now, Says Creator of the 4% Rule.”

In the article, the WSJ quoted the father of the 4% rule, William Bengen, as saying that “there’s no precedent for today’s conditions.” Stock and bond prices are still at record highs. Mix in a reference to 8.5% inflation, and the WSJ starts to sound like an insurance salesperson pitching indexed annuities.

So are things really that bad? And do retirees need to rethink the 4% Rule? I don’t think so, and here’s why.

The 4% Rule is Now the 4.4% Rule

In the article, Mr. Bengen said he believes a safe initial withdrawal rate is 4.4%. Yes, that’s an increase from his initial findings in his 1994 paper.

In his 1994 paper, he assumed retirees invested in the S&P 500 and intermediate Treasury bonds. That’s it. Since then he expanded the asset classes to include mid-cap, small-cap, micro-cap and international stocks. This diversification caused him to increase the safe withdrawal rate from 4% to 4.7%. Because of the unprecedented conditions noted above, however, new retirees might want to start at 4.4%, he said.

As far as I can tell, the 4.4% rate is not based on data. Still, it represents a 10% increase, not decrease, from his initial 4% rule. That doesn’t sound so bad.

“The combination of 8.5% inflation with high stock and bond market valuations make it difficult to forecast whether the standard playbook will work for recent retirees,” said Bengen. He’s even gone so far as put 70% of his personal portfolio in cash. When the father of the 4% rule cashes out, shouldn’t we?

I don’t think so. For starters, it’s important to understand how Bengen developed the 4% Rule. He examined 50-year retirement periods dating back to 1926. For each, he identified the highest withdrawal rate one could take in the first year of retirement, adjusted for inflation in subsequent years, without running out of money for at least 30 years.

As you might imagine, every year had a different initial withdrawal rate. Some years the starting rate was twice what it was in others. Here’s the key point. He didn’t average all of these initial withdrawal rates to come up with the 4% rule. He took the absolute worst year—1968.

Here’s more on how the 4% Rule works.

What does this mean? It means the 4% Rule has survived the stock market crash of 1929, the Great Depression, WWII, the Korean War, the Vietnam War, the inflation of the 1970s and early 1908s, the 1987 market crash, 9/11, the Great Recession and Covid-19.

Stock Prices

No matter how difficult past times have been, current conditions feel awful in ways that history never can. One need look no further than Robert Shiller’s CAPE (cyclically adjusted price-to-earnings ratio) of the S&P 500 to raise concerns. It stands at roughly twice its average and at historic highs. It’s only been higher once, and that was during the tech bubble.

Yet as “unprecedented” as this may seem, it’s not for two reasons. First, most portfolios don’t have the same PE as the S&P 500, even if measured using CAPE. Add in mid-cap, small-cap and international stocks, and the PE comes down significantly.

Second, and more important, the CAPE of the S&P 500 would fall to average with a 50% decline in the S&P 500. This wouldn’t be fun, but it wouldn’t be unprecedented, either.

As noted above, the market lost 90% to kick off the Great Depression. And going back to the tech bubble, the market lost 9%, 12% and 22% from 2000 to 2002. That’s not quite a 50% total loss, but close. And from peak to trough during the Great Recession (2007-2009), the market lost more than 50%. The 4% Rule survived like a cockroach.

Bond Prices and Inflation

Bond yields were at historic lows. I say “were” because that’s no longer the case. The roughly 3% yield on the 10-year Treasury is still below average, but there are plenty of years dating back to the 1800s when they were lower. And when Bengen published his 1994 paper, TIPS were three years away and the first I bond was still four years away. So at least now we can keep up with inflation.

Here’s the key. The 4% Rule has survived Treasury yields as low as 1 to 2%. It also survived inflation of more than 13% and a decade of inflation at 6% or higher. And like the Energizer Bunny, it keeps going and going (or ticking for you Timex fans).

Final Thoughts

Some year might come along that is worse than 1968 for new retirees. Maybe 2022 will turn out to be a worse time to retiree since the late 60s. Perhaps in 30 years we’ll know that for 2022, the initial safe withdrawal rate was 4.2% instead of 4.4%.

But can we really predict that based on current conditions, when the 4% rule has survived much worse? I don’t think so.

Rob is a Contributing Editor for Forbes Advisor, host of the Financial Freedom Show, and the author of Retire Before Mom and Dad–The Simple Numbers Behind a Lifetime of

Source: Will Inflation And The Stock Market Conspire To Kill The 4% Rule?

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Russia Debt Default Could See the US Seize the Country’s Assets

The impending Russian debt default is likely to be one of the most difficult in history to resolve, and could even lead the US to permanently seize assets from the country’s central bank, according to a report from the consultancy Oxford Economics.

Russia is facing its first default on its foreign-currency debt since the aftermath of the Bolshevik revolution in 1918.

The US Treasury earlier this month blocked Russia from paying $650 million due on two bonds using funds held at American banks. Russia has instead tried to pay in rubles, but credit ratings agencies have said this would constitute a default.

Russia has a 30-day grace period from April 4 in which to pay in dollars. But thoughts are now turning to the next steps, and how bondholders might recoup their money.

Tatiana Orlova, lead emerging markets economist at Oxford Economics, said investors face a “very long and difficult” legal road. “Russia’s debt crisis will be among the most difficult in history to resolve, since the default has its roots in politics rather than finance,” she wrote in a report that was sent to clients Thursday.

One of the key problems is that political and financial relations between Russia and the West have completely broken down. That makes the usual default process, whereby bondholders and the government enter negotiations and thrash out a deal, seem unlikely to happen.

Orlova said another problem for bondholders is that Ukraine may lay a claim to Russian assets in international courts to pay for the rebuilding of the country. In that case, investors would have to weigh up whether they want to compete with the Ukrainian government for Russian assets.

The economist said the US might eventually end up seizing the money from the Russian central bank’s foreign currency reserves. Western governments have already frozen the bulk of the roughly $600 billion stockpile. Joe Biden earlier this year ordered that half of Afghanistan’s central bank reserves, which were also frozen, be made available as possible compensation for victims of 9/11 and to fund humanitarian support in the country.

“The US administration could possibly find a stronger moral cause for splitting the US-denominated portion of Russia’s FX reserves between Ukraine and bondholders,” Orlova said. Russia’s Finance Minister Anton Siluanov has said the government has fulfilled its obligations by paying in rubles. He said last week Western governments are forcing Russia into a default and threatened to take legal action.

It’s not just holders of Russian sovereign debt who may have to take to the courts to try to get their money. Orlova’s report said there is likely to be an “avalanche” of Russian corporate debt defaults, given that the US is taking a hard line and banning American banks from processing payments.

An international committee of banks last week deemed state-owned Russian Railways to be in default, after sanctions stopped the company from making bond payments.

There were roughly $98 billion of Russian corporate foreign-currency bonds outstanding as the war began in February, according to JPMorgan, with $21.3 billion owned by foreign investors.

By:

Source: Russia Debt Default Could See the US Seize the Country’s Assets: Economist

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Critics:

By:

A default would make Russia more of a pariah in the global economy. Selling bonds is a critical way that countries raise foreign currencies to fund projects and raise reserves of foreign currencies, among other purposes.

But the European Union is considering a ban on energy imports from Russia, which would further limit Russia’s ability to raise money in foreign currencies.Countries that have defaulted on their bonds have eventually been welcomed back to global debt markets, but memories of a default linger and Russia may have to pay more to borrow from foreign investors in the future.

A default would also be historically significant and fraught with symbolism. It would mark the first time Russia has defaulted on foreign bond payments in more than a century (though it did default on local currency debt in 1998). Russia’s predicament is yet another consequence of its invasion of Ukraine, according to Tim Samples, a professor at the University of Georgia who specializes in foreign investment.

“This is a reflection of just how far and how fast Russia has fallen from favor in Western capital markets,” he said. Not necessarily, but most investors will need to go through a protracted legal battle to try to get the money they are owed.

Although Russia was not a big seller of foreign debt, major hedge funds and asset managers, including Invesco and PIMCO, bought bonds. Russia has 15 bonds outstanding that are denominated in dollars and euros, and altogether, they are worth around $40 billion, according to Morgan Stanley.

Much of Russia’s debt was registered in the United Kingdom, which is where it’s likely that most of the court fights will take place. It can be a complicated process, and it will take a long time to resolve. After Argentina defaulted in 2001, several efforts were made to restructure the country’s debt. All told, negotiations lasted longer than a decade.

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‘Market Is Not Quite Ready’—Bitcoin Billionaire Issues A Serious Crypto Warning As The Price Of Ethereum, BNB, Solana, Cardano, XRP And Luna Suddenly Crash

Bitcoin and cryptocurrency prices have bounced back this week, riding a wave of positive news even as researchers warn of crypto thefts.

The bitcoin price came within touching distance of $50,000 per bitcoin but has today dropped back, losing more than $2,000 per bitcoin in a matter of hours. Ethereum has also erased its latest gains, despite traders eagerly eyeing a long-awaited upgrade.

Now, after El Salvador last week postponed its controversial $1 billion bitcoin-backed bond, outspoken bitcoin billionaire Michael Saylor has warned the market perhaps isn’t “quite ready” for bitcoin bonds.

“I’d love to see a day where people eventually sell bitcoin-backed bonds like mortgage-backed securities,” Saylor, the chief executive of business intelligence software company MicroStrategy, which has pivoted to become a bitcoin acquisition vehicle over the last two years, told Bloomberg in an interview. “The market is not quite ready for that right now. The next best idea was a term loan from a major bank.”

Last week, El Salvador, which became the world’s first country to adopt bitcoin as legal tender last year, revealed it had postponed its planned $1 billion bitcoin bond offering with the country’s finance minister Alejandro Zelaya blaming unfavorable market conditions—but El Salvador’s president Nayib Bukele blaming the delay on necessary pension reforms.

“I think this is not the time,” Zelaya said in comments reported by Reuters, with Russia’s invasion of Ukraine unsettling markets in recent weeks. “In May and June sometimes you can, but the market variables get different. After September, it is difficult to raise, unless you are previously funded, as in the case of bitcoin bond.”

The hotly-anticipated bitcoin bond, designed to fund the creation of an ultra-low tax bitcoin city in El Salvador, will have a “substantial oversubscription” that could reach $1.5 billion, according to Zelaya. Half of the funds raised will be used by the country to buy more bitcoin and the rest earmarked to develop bitcoin mining infrastructure powered by a volcano.

Earlier this week, MicroStrategy announced it’s bitcoin-focused subsidiary MacroStrategy had taken on a $205 million loan to buy more bitcoin, adding to its 125,000 bitcoin hoard. MicroStrategy stock price, up some three-fold since it first began buying bitcoin, has slide 6% this week.

The loan will give MicroStrategy “an opportunity to further our position” as the largest publicly-traded bitcoin investor, Saylor said in a statement.

I am a journalist with significant experience covering technology, finance, economics, and business around the world. As the founding editor of Verdict.co.uk

Source: ‘Market Is Not Quite Ready’—Bitcoin Billionaire Issues A Serious Crypto Warning As The Price Of Ethereum, BNB, Solana, Cardano, XRP And Luna Suddenly Crash

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Critics:

MicroStrategy CEO and Bitcoin permabull, Michael Saylor believes that traditional financial markets aren’t quite ready for Bitcoin-backed bonds. Saylor told Bloomberg on Tuesday, that he’d love to see the day come where Bitcoin-backed bonds are sold like mortgage-backed securities, but warned that, “the market is not quite ready for that right now. The next best idea was a term loan from a major bank.”

The remarks come two days after MicroStrategy’s (MSTR) Bitcoin-specific subsidiary MacroStrategy, announced that it had taken out a $205 million Bitcoin-collateralized loan to purchase even more Bitcoin. This loan was unique, as it marked MicroStrategy’s first time borrowing against its own Bitcoin reserves — which are currently valued at approximately $6 billion — to buy more of the cryptocurrency.

Saylor’s comments also follow El Salvador’s recent decision to postpone the issuance of its $1 billion dollar Bitcoin-backed “Volcano Bond” on March 23rd. According to El Salvador’s Finance Minister Alejandro Zelaya, the decision to delay the bond was due to general financial uncertainty in the global market driven by conflict in Ukraine.

In a potential warning to El Salvador, Saylor said that the country’s Volcano Bond was somewhat more risky than his company’s Bitcoin-collateralized loan,Saylor added that he remains extremely bullish on the long-term potential for Bitcoin-based bonds, going as far to say that it would be a good idea for cities like New York to use Bitcoin as a debt instrument.

Related: MicroStrategy CEO won’t sell $5B BTC stash despite crypto winterSince its initial $250-million Bitcoin investment in August 2020, MicroStrategy has now amassed a substantial 125,051 BTC — which at the current price of $44,547 equates to $5.5 billion. MicroStrategy has made a series of separate BTC purchases using the company’s cash on hand as well as the proceeds of sales of convertible senior notes in private offerings to institutional buyers.

Saylor’s actions have gradually transformed MicroStrategy into a partly leveraged Bitcoin holdings company, with MSTR shares closely correlated with the price of Bitcoin.

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Russia Launches Eurobond Rouble Buyback Offer on Looming $2 bln Bond Payment

A view shows Russian rouble coins in this picture illustration taken October 26, 2018. Picture taken October 26, 2018. REUTERS/Maxim Shemetov

  • Eurobond rouble payment offer rekindles default fears
  • Moscow does not say if bondholders must take roubles
  • Russia has already demanded gas payments in roubles
  • Move may help locals facing dollar payment restrictions

LONDON, March 29 (Reuters) – Russia has offered to buy back dollar bonds maturing next week in roubles in a move seen by analysts as helping local holders of the $2 billion sovereign issue receive payment, while also easing the country’s hard-currency repayment burden.

The finance ministry offer on Eurobonds maturing on April 4, Russia’s biggest debt payment this year, follows Western moves to tighten sanctions against the country over its invasion of Ukraine and to freeze Moscow out of international finance.

Moscow, which calls its actions in Ukraine a “special military operation”, says Western measures amount to “economic war”. In response, it has introduced countermeasures and has demanded foreign firms pay for Russian gas in roubles rather than dollars or euros. read more

The bonds – issued in 2012 – would be bought at a price equivalent to 100% of their nominal value, the ministry said its statement. Buying back bonds will reduce the overall size of the outstanding bond when it matures on April 4.

However, it was not immediately clear if the amount the government would buy back was limited or what would happen to holdings of creditors that would not tender their bonds.

The terms of the bond prescribe that repayment has to occur in dollars. Repaying at maturity in roubles might again raise the prospect of Russia’s first external sovereign default in a century.

Analysts and investors said the move was likely designed to help Russian holders who now face restrictions in receiving dollar payments.

“This is a tender offer and not a final decision that these bonds will be paid in roubles. Perhaps, Russian authorities want to gauge investors’ willingness to accept payment in roubles?” said Seaport Global credit analyst Himanshu Porwal.

Tim Ash of BlueBay Asset Management, which is not a bondholder, said the move was part of a fight back by Russia’s central bank and finance ministry “to fend off default and stabilise markets and the rouble”.

Ash said the United States’ Office of Foreign Assets Control (OFAC), which enforces U.S. sanctions, “should make clear” it will not extend a deadline of May 25 for U.S. individuals or entities to receive payments on Russian sovereign bonds.

Russia’s finance ministry said in its statement on Tuesday that bondholders should submit requests to sell their holdings to the National Settlement Depository between 1300 GMT on March 29 and 1400 GMT on March 30.

SECURING PAYMENT

A fund manager said the ministry’s offer might be designed to help Russian investors secure payment because Euroclear, an international settlement system, had been blocking dollar payments to the Russian clearing system.

“Everybody wants dollars right now – in and outside Russia – so I would assume that only local holders and local banks that have issues with sanctions will make use of this operation,” said Kaan Nazli, portfolio manager at Neuberger Berman, which recently reduced its exposure to Russian sovereign debt.

Nazli, who said he had not previously seen a buyback that switched the repayment currency, added that foreign investors were unlikely to be interested given the rouble “is no longer a convertible currency.”

The rouble initially crumbled after the West imposed sanctions, plunging as much as 40% in value against the dollar since the start of 2022. It has since recovered and was trading down about 10% in Moscow on Tuesday.

The finance ministry did not provide a breakdown of foreign and Russian holders of the Eurobond-2022. It did not respond to a request about how much of the outstanding $2 billion it wanted to buy back or what would happen if investors refused the offer.

The bond has a 30-day grace period and no provisions for payments in alternative currencies, JPMorgan said.

According to Refinitiv database eMAXX, which analyses public filings, major asset managers such as Brandywine, Axa, Morgan Stanley Investment Management, BlackRock were recently among the holders of the bond coming due on April 4.

The finance ministry had said earlier on Tuesday it had fully paid a $102 million coupon on Russia’s Eurobond due in 2035, its third payout since Western sanctions called into question Moscow’s ability to service its foreign currency debt.

Russian sovereign debt repayments have so far gone through, staving off a default, although sanctions have frozen a chunk of Moscow’s huge foreign reserves. Russian officials have said any problem with payment that led to a formal declaration of default would be an artificial default.

Russia’s next payment is on March 31 when a $447 million payment falls due. On April 4, it also should pay $84 million in coupon a 2042 sovereign dollar bond

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Critics:

Despite warnings from credit-rating agencies, the government has so far sidestepped a default and continues to service its foreign bonds after sanctions over the invasion of Ukraine severed Russia from the global financial system. Capital controls and restrictions imposed by the world’s biggest settlement systems have complicated and delayed the arrival of funds on previous payments for foreign and local investors alike.  

“For the Finance Ministry, this reduces potential amount of foreign currency payments, which is also desirable for them,” Donets said. “The absolute majority of the local holders will use this option. No one is talking about a full shift to paying in rubles for all Russia eurobonds.” Earlier on Tuesday, the Finance Ministry said it had made a $102 million coupon payment on a dollar bond maturing in 2035. 

The buyback offer comes after the ministry filed notifications on Monday for an “interest payment” and “principal repayment” on the $2 billion of dollar-denominated debt due on April 4. It also filed a notification for a coupon on bonds due in April 2042. 

The Treasury Department issued a general license on March 2 that allows U.S. persons to receive bond payments from the central bank of Russia through May 25, further draining the country’s resources as it prosecutes a war in Ukraine, according to a Treasury spokesperson. Questions about where exactly the funds were being drawn were referred to the central bank of Russia.

Foreign bondholders of Russian steelmaker Novolipetsk Steel received coupon payments due March 21 on time, while local noteholders didn’t receive them, the company said in a statement a week ago. Two days later, an overdue interest payment on a sovereign Eurobond began to show up in some overseas investors’ accounts. 

“The government wants to remove the risk of default due to technical payment issues,” said Cristian Maggio, head of portfolio strategy at Toronto Dominion Bank in London. 

Despite the uncertainties, the ruble has strengthened in 13 of the past 14 trading sessions in Moscow, paring most of the 33% decline that it incurred in onshore trading from late February through early March. The rebound is a result of central bank policies, such as capital controls, that enforce buying and limit selling the ruble, said Natalie Rivett, senior emerging-market analyst at Informa Global Markets Ltd.

More contents:

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Will Russian Bonds Default? Investors Keep Watch: QuickTake

Russia Signals Repayment Coming for $2 Blion Bond Due in April

Russia Bond Payment Uncertainty Grows With Clearstream Step 

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