Stephen Roach says Russian default will hurt emerging markets – and China

Economist Stephen Roach has warned that the effects of any default on Russia’s sovereign debt as a result of the Ukraine crisis will extend to emerging markets, including China.

“If Russia defaults on its debt…there will be broad implications for sovereign debt in emerging markets around the world, and China will not be affected,” he told CNBC’s Squawk Books Asia. “But I’m really talking about a broader risk — guilt by extension.”

“China cannot afford to remain in close alliance with Russia as it is waging this truly horrific campaign against innocent Ukraine right now,” added Roach, a senior fellow at Yale University.

“The faster China decouples from Russia, the better – and we’ll have to wait and see and watch that closely,” he said.

Shortly after Moscow launched its attack on Ukraine, the United States announced sanctions on Russia’s sovereign debt as well as on its banks and central bank. Since then, major rating agencies Fitch, Moody’s and Standard & Poor’s have lowered the country’s sovereign rating to “junk”, saying Western sanctions could undermine Russia’s ability to service its debt.

China said It will not participate in those sanctions against Russia.

Meanwhile, global index providers MSCI and FTSE Russell announced last week that Russian stocks will be withdrawn from all of their indices. MSCI also announced that it will reclassify its MSCI Russia indices to “stand-alone markets” instead of emerging markets.

Russian stocks listed in London collapsed last week, before the London Stock Exchange suspended trading in 27 Russian securities. However, nearly all of its value had been wiped out by the time the suspension was announced Thursday.

Oil prices rose on Monday morning In Asia, after US Secretary of State Anthony Blinken said Washington and its allies were considering banning imports of Russian oil and natural gas.

US crude rose about 9% to over $130 a barrel at one point, while Brent crude jumped as much as 9% to about $128 a barrel. Both recorded highs not seen since 2008. US crude was recently trading up 7.49% to $124.35, while Brent crude rose 8.85% to $128.56.

After the United States, Saudi Arabia, Russia The third largest oil producer in the world. It’s also a file The largest exporter of crude oil to world markets.

Roach told CNBC that higher oil prices “definitely lead to stagflation.”

Stagflation occurs when the economy is simultaneously experiencing stagnation of activity and acceleration of inflation. This phenomenon was first recognized in the 1970s when an oil shock led to an extended period of high prices with a sharp decline in GDP growth.

“It certainly puts pressure on central banks around the world… and increases the odds of interest rates rising significantly as a result, but it remains to be seen whether this trend will continue for many years like stagflation in the late 1970s,” Roach said: