Debt markets in some of the world’s most vulnerable countries have been giving warning signals since the start of Russia’s special operation in Ukraine because of the additional strain on their fragile economies, Bloomberg writes.

Worries about whether Russia will be able to pay interest on its obligations have left investors wondering which other countries have default risk. That has driven up the cost of default insurance in emerging markets to the highest level since the 2020 pandemic.

Funds have gotten rid of emerging-market bonds since the special operation began this year, with outflows reaching $14.3 billion as of March 16, according to Bank of America Corp. data cited by EPFR Global.

The volume of dollar-denominated corporate and sovereign bonds, which are now trading at distressed levels – that is, 1,000 basis points above U.S. Treasuries – has already topped $500 billion, mostly bonds from 14 countries, dominated by those struggling to recover from the coronavirus pandemic.

The first question for investors is whether Russia will be able to avoid default, although holders of Russian Eurobonds maturing last week said they received payment in dollars, a relief for investors who feared the debt would be repaid in rubles.

As for Belarus, a default is also likely, according to Moody’s Investors Service, which this month downgraded the country by four levels to its second lowest rating. That has caused its debt to overtake Lebanon as the world’s most troubled, and its bonds are quoted at less than 7 cents to $1.

Economically and commercially dependent on Russia in their own way, other former Soviet republics have fallen into a trap of sorts. Tajikistan, whose remittances from Russia can account for a quarter of the economy, will give bondholders a 26% loss since the Feb. 21 market sell-off. Georgia’s dollar bonds have also suffered double-digit losses.

Countries that rely heavily on Russian remittances will suffer because of the ruble’s weakness and the possible loss of Russian jobs to migrants.

The next group of vulnerable countries includes those outside the former Soviet bloc that rely on Russia and Ukraine for fuel and food imports. As these supplies dry up or are blocked by sanctions, Pakistan’s debt has become distressed, causing investors to lose 20%. Sri Lanka’s bonds, which were in trouble even before the conflict, have fallen below 50 cents due to fears of default. Both countries are forecast to see inflation surge about 10% this year as the conflict causes oil prices to soar above $100 a barrel and wheat futures to a record high.

Another group of countries are those with potentially the most to lose, as they benefit from tourists from Russia and Ukraine, as well as commodity flows. This could be a long-term problem facing countries such as Egypt and Turkey, whose biggest trading partners are Russia.

While Turkey’s local bonds are not at problem levels, they have suffered the biggest losses among emerging markets since Feb. 21, and the lira has fallen about 10 percent this year – more than the Ukrainian currency. Rising energy and food prices, as well as the loss of tourism revenue, will make the country’s already large balance of payments and inflation problems much more severe. As for Egypt, about 6.6% of its exports go to Ukraine and Russia, while 40% of its tourists come from these two countries.

But if you look at other countries that supply the world market with raw materials, the bonds of such countries have risen over the past month thanks to a sharp rise in energy prices, with Angola and South Africa topping the list of winners. They were followed by debt issued by Middle Eastern oil producers Oman and Bahrain.

Latin America will also benefit in some ways from the surge in commodity and food prices caused by the crisis. However, a big blow to global economic growth could exacerbate the difficulties already being felt in the region, which suffered a series of government defaults during the pandemic. While large economies such as Argentina were in trouble even before the virus emerged, tourism-dependent countries such as Belize had little chance of meeting debt obligations.