Russia has defaulted on its foreign-currency sovereign debt for the first time in a century, the height of tougher Western sanctions that have shut down payment methods to creditors abroad.
For months, the country found ways to get around the sanctions imposed after Russia’s invasion of Ukraine.
But at the end of Sunday’s business day, the grace period expired on about $100 million in interest payments due on May 27, a deadline considered a default event if he missed it.
The country’s Eurobonds have been trading at sad levels since the beginning of March, the central bank’s foreign reserves have remained frozen, and the largest banks have been cut off from the global financial system, according to “Bloomberg” and seen by “Al Arabiya.net.”
But given the damage already done to the economy and markets, the default is also mostly symbolic at the moment, and it doesn’t matter much to Russians who are dealing with double-digit inflation and the worst economic downturn in years.
Russia opposed the default rating, saying it had the funds to cover any bills and had to default.
As it was trying to change course, it announced last week that it would switch to servicing its outstanding sovereign debt of $40 billion in rubles, denouncing the “force majeure situation”, which it described as a “Western contrived industry”.
For his part, said Hassan Malik, senior sovereign analyst at Loomis Sales & Company, “It is very rare, where a government with the means is forced by an external government to default… it would be a historic event.”
Official announcements usually come from rating companies, but European sanctions have led to the withdrawal of the ratings of Russian entities.
According to the bond documents, which expired on Sunday, 25% of existing bond holders can declare default.
As the deadline passes, the focus shifts to what investors can do next.
They do not need to act immediately, Malik said, and may choose to monitor the progress of the war in hopes of eventually easing sanctions.
He added, “Time may be in their favor, as claims to the right fall after 3 years from the date of payment, according to the bond documents.”
Economist at Nomura Research Institute in Tokyo, Takede Kiyoshi, believes most bondholders will maintain a wait-and-see approach.
During the Russian financial crisis and the collapse of the ruble in 1998, President Boris Yeltsin’s government defaulted on $40 billion in domestic debt.
The last time Russia fell into default with its foreign creditors was more than a century ago, when Vladimir Lenin’s Bolsheviks repudiated the staggering debt burden of the Czar’s era in 1918.
By some measures, Russia’s debt at that time was about $1 trillion in today’s money.
By comparison, foreigners owned nearly $20 billion in Russian Eurobonds as of the beginning of April, a drop of about 50% from foreign debt levels in 2018.
Malik said the broader issue was that the sanctions were themselves a response to action by the sovereign entity, referring to the invasion of Ukraine, adding: “I think history will judge this in the last light.”
Finance Minister Anton Siluanov dismissed the situation on Thursday as a “farce”.
With billions of dollars a week pouring into state coffers from energy exports, despite the grinding conflict in eastern Ukraine, Siluanov reiterated, the country has the means and the will to pay.
“Anyone can say whatever they like, but anyone who understands what’s going on knows that this is by no means a hypothetical backwardness,” Siluanov said.
The reason behind Russia’s default is after the US Treasury allowed a loophole in sanctions to expire, removing the exemption that allowed US bondholders to receive payments from the Russian state.
A week later, the European Union also imposed sanctions on the Russian payment agent, the National Clearing and Settlement Corporation.
In response, Vladimir Putin introduced new regulations requiring that Russia’s obligations on foreign currency bonds be fulfilled by simply transferring the appropriate amount in rubles to the local payment agent.
The Finance Ministry made the latest interest payments, equivalent to about $400 million, under those rules on Thursday and Friday. However, none of the underlying bonds has terms that allow settlement in the local currency.
So far, it is not clear whether investors will use the new tool and whether existing sanctions will even allow them to return the money.
According to Siluanov, it does not make sense for creditors to request a declaration of default through the courts because Russia has not waived its sovereign immunity, and no foreign court would have jurisdiction.
“If we eventually get to the point where diplomatic assets are called for, this is tantamount to severing diplomatic relations and entering into direct conflict,” he said.
“This would put us in a different world with completely different rules, and we would have to act differently in this case, not through legal channels,” he added.
The Kremlin denies
For its part, the Kremlin stressed on Monday that there was “no basis” to say that Russia had defaulted on its sovereign debt in foreign currencies.
“There is no basis to describe this situation as a default,” Kremlin spokesman Dmitry Peskov told reporters, after the deadline for a major payment expired Sunday.
“These allegations of default are completely false,” he added, noting that Russia settled its debts in May.