As of Wednesday Russia has been scheduled to pay investors holding two dollar-denominated government bonds $117m in interest payments. It will likely make the payments, but probably in roubles rather than dollars. Some of Russia’s debt contracts permit such an arrangement; the two bonds in question do not. Russia has a grace period of 30 days within which to make payments in the normal fashion. If it fails to do so, it is likely to be declared in default by its creditor.
Sovereign defaults send shockwaves through the global financial system. They signal that a debtor at the very apex of the monetary system – a government – is either unwilling or unable to meet its obligations. Since, in a modern monetary system, government debt is generally treated as the ultimate safe asset, this is a shock that goes beyond the arena of high finance. Russian defaults have rocked the global financial system twice in modern history. In 1917, the Bolsheviks repudiated the debts of the Tsarist empire, souring relations with Russia’s former allies, most notably France, for decades to come. In 1998, in the financial crisis that defined Vladimir Putin’s rise to power, Russia defaulted on its domestic debt and some Soviet-era foreign debt. The repercussions were significant enough to bring about the meltdown of the LTCM hedge fund, the world’s biggest, in New York.
