After missing a deadline on Sunday, sources indicate that Russia has defaulted on its foreign debt for the first time in more than a century.
The restrictions prevented Russia from transferring the $100 million payment to international creditors, despite the fact that Russia has the money and is prepared to do so.
The default would have been a serious blow to the country’s reputation, and the Kremlin was determined to prevent it.
The scenario was described as “a farce” by the Russian finance minister.
On May 27, the $100 million interest payment was due. According to Russia, the funds were transferred to a bank called Euroclear, which would then distribute the funds to investors.
However, according to Bloomberg News, that payment has been held there and has not yet reached the creditors.
The Reuters news agency cited two sources when reporting that some Taiwanese bondholders of Russian bonds with euros as the unit of currency have not received interest payments.
It is deemed a default because the money was not received within 30 days of the due date, which was Sunday night.
While refusing to confirm if the payment had been blocked, Euroclear insisted that it abided by all restrictions.
Although a symbolic setback, a default will not have many immediate real-world effects on Russia.
Normally, countries that have defaulted cannot borrow any additional money, but sanctions have effectively prevented Russia from borrowing in Western markets.
Regardless, it is apparently making about $1 billion per day from the sale of fossil fuels, and Russian Finance Minister Anton Siluanov stated in April that the nation has no intentions to take on additional debt.
According to Chris Weafer, former top strategist at Russia’s largest bank Sberbank-CIB and CEO of Moscow-based consultancy Macro Advisory, the default will force repayments on a sizable portion of Russia’s debt.
As a result of early repayment clauses in all debt instruments, he explained, “Some portions of that debt will now become automatically due. If you default on one, it typically triggers the immediate demand for payment on the other debts, so Russia could certainly face immediate debt repayment of about $20bn at this stage.”
The last time Russia went into default on foreign debt was in 1918, during the Bolshevik Revolution, when Vladimir Lenin, the new communist leader, refused to settle the bills of the Russian Empire.
The last time Russia experienced a debt default of any kind was in 1998 when Boris Yeltsin’s administration was chaotically overthrown and the nation was shaken by the rouble crisis. Moscow at the time failed to make payments on its domestic bonds but avoided defaulting on its foreign debt.
Since the US and EU first imposed sanctions in response to the invasion of Ukraine, it has seemed as though Russia will eventually go into default.
These limited the country’s access to the global financial networks that handled payments from investors in other countries to those in Russia.
In spite of the fact that Russia is profiting from the sale of expensive commodities like oil, Mr. Weafer claimed that the default would have a “legacy” problem if the situation with Ukraine and the ensuing sanctions improved.
When we reach that point, “this is the kind of activity that will hang over the economy and make recovery much more difficult,” he warned.
Up until this point, the Russian government had been successful in adhering to its promise to make all of its payments on time.
A little over half of Russia’s $40 billion in debt is held outside of the nation and is denominated in dollars or euros.
When the US Treasury chose not to extend the specific exception in sanctions laws allowing investors to receive interest payments from Russia, which expired on May 25, default appeared to be unavoidable.
By announcing on June 23 that all future debt payments will be made in roubles through a Russian bank, the National Settlements Depository, even when contracts specify that they should be made in dollars or other foreign currencies, the Kremlin also appeared to have conceded this inevitable fact.
According to the news agency RIA Novosti, Mr. Siluanov acknowledged that foreign investors would “not be able to collect” the payouts.
He stated there were two reasons for this. “The first is that any operations involving Russia are forbidden for foreign infrastructure, including correspondent banks, settlement and clearing systems, and depositories. The second is that we expressly forbid foreign investors from getting compensation from us.”
He disputed that this amounts to a genuine default, which often occurs when governments refuse to pay or their economies are so fragile that they are unable to find the money. Russia wants to pay and has enough money to do so.
He was quoted by RIA Novosti as saying, “Everyone in the know understands that this is not at all a default.” “Everything about this seems to be a farce.”