Russia is poised to default on its debt for the first time since 1998, further alienating the country from the global financial system after sanctions imposed over its war in Ukraine.
The country missed a deadline of Sunday night to meet a 30-day grace period on interest payments of $100m (£81.2m) on two eurobonds originally due on 27 May, Bloomberg reported on Monday morning.
Some Taiwanese holders of Russian eurobonds said on Monday that they had not received interest payments due, two sources told Reuters. Official confirmation of the default was expected to come from international ratings agencies.
Russia’s efforts to avoid the default hit a insurmountable roadblock in late May when the US treasury department’s office of foreign assets control (OFAC) effectively blocked Moscow from making payments.
“Since March we thought that a Russian default is probably inevitable, and the question was just when,” Dennis Hranitzky, the head of sovereign litigation at law firm Quinn Emanuel, told Reuters. “OFAC has intervened to answer that question for us, and the default is now upon us.”
While a formal default would be largely symbolic given Russia cannot borrow internationally at the moment and does not need to thanks to plentiful oil and gas export revenues, the stigma would probably raise its borrowing costs in future.
The Kremlin denied the country was in default, with Vladimir Putin’s spokesperson, Dmitry Peskov, calling the claims “absolutely unjustified” and saying it was “not our problem” that sanctions had prevented intermediaries from transferring the payments.
Russia has defaulted for first time in a century on $100m in interest payments
— Ayesha Tariq, CFA (@ayeshatariq) June 27, 2022
Russia has pushed back against the default, saying it has the funds to cover & has been forced into non-payment
Investors can wait & see
A formal default declaration would come from a ratings agency https://t.co/n27uvzPs6I pic.twitter.com/RILrYAQ3Cy
Russia owes about $40bn in foreign bonds. Before the start of the war, Moscow had about $640bn in foreign currency and gold reserves, much of which was held overseas and is frozen.
Ukraine and some western countries want to use this frozen cash to repair the damage caused by the war and compensate for Kyiv’s losses. Peskov called such an idea “completely illegal and essentially amount to straight-up theft”.
Investors have expected Russia to default for months. Insurance contracts that cover Russian debt have priced a 80% likelihood of default for weeks, and rating agencies such as Standard & Poor’s and Moody’s have placed the country’s debt deep into junk territory.
Once a country defaults, it can be cut off from bond-market borrowing until the default is sorted out and investors regain confidence in the government’s ability and willingness to pay. Russia has already been cut off from western capital markets, so any return to borrowing is a long way off anyway.
The Kremlin can still borrow roubles at home, where it mostly relies on Russian banks to buy its bonds.
Western sanctions over the war have sent foreign companies fleeing from Russia and interrupted the country’s trade and financial ties with the rest of the world. Default would be one more symptom of that isolation and disruption.
Investment analysts are cautiously reckoning that a Russian default would not have the kind of impact on global financial markets and institutions that came from its default in 1998. Back then, Russia’s default on domestic rouble bonds led the US government to step in and get banks to bail out Long-Term Capital Management, a large US hedge fund whose collapse, it was feared, could have shaken the wider financial and banking system.
