RSussia has defaulted in its foreign-currency sovereign loan for the first time since 1900. This was the culmination ever-sharper Western sanctions which shut down payments to creditors overseas.
For months, the country found paths around the penalties imposed after the Kremlin’s invasion of Ukraine. However, Sunday’s closing time saw the expiration of the grace period to pay $100 million in unpaid interest due on May 27, which was considered an event de default.
It’s a grim marker in the country’s rapid transformation into an economic, financial and political outcast. The nation’s eurobonds have traded at distressed levels since the start of March, the central bank’s foreign reserves remain frozen, and the biggest banks are severed from the global financial system.
However, given the extent of the economic and market damage, default is symbolic at best. It doesn’t matter to Russians who are dealing with inflation in double digits and an unprecedented economic contraction.
Continue reading: How Sanctions on Russia Will Hurt—and Help—the World’s Economies
Russia countered the default designation by claiming that it has sufficient funds to pay any bills. As it tried to twist its way out, it announced last week that it would switch to servicing its $40 billion of outstanding sovereign debt in rubles, criticizing a “force-majeure” situation it said was artificially manufactured by the West.
“It’s a very, very rare thing, where a government that otherwise has the means is forced by an external government into default,” said Hassan Malik, senior sovereign analyst at Loomis Sayles & Company LP. “It’s going to be one of the big watershed defaults in history.”
Rating firms usually make the formal declaration. However, European sanctions have led to their withdrawal of ratings on Russian entities. According to the documents for the notes whose grace period expired Sunday, holders can call one themselves if owners of 25% of the outstanding bonds agree that an “Event of Default” has occurred.
Now that the deadline has passed, investors can focus on what they do next.
They don’t need to act immediately, and may choose to monitor the progress of the war in the hope that sanctions are eventually softened. The bond documents indicate that the claimants have three years to vacate their claims.
“Most bondholders will keep the wait-and-see approach,” Takahide Kiuchi, an economist at Nomura Research Institute in Tokyo.
During Russia’s financial crisis and ruble collapse of 1998, President Boris Yeltsin’s government defaulted on $40 billion of its local debt, while declaring a moratorium on foreign debt.
The last time Russia fell into default vis-a-vis its foreign creditors was more than a century ago, when the Bolsheviks under Vladimir Lenin repudiated the nation’s staggering Czarist-era debt load in 1918.
By some measures it approached a trillion dollars in today’s money, according to Loomis Sayles’ Malik, who is also author of ‘Bankers and Bolsheviks: International Finance and the Russian Revolution.’
By comparison, foreigners held the equivalent of almost $20 billion of Russia’s eurobonds as of the start of April.
Russia Debt held abroad below 50%, first time since 2018: Chart
“Is it a justifiable excuse to say: ‘Oh well, the sanctions prevented me from making the payments, so it’s not my fault’?” Malik said.
“The broader issue is that the sanctions were themselves a response to an action on the part of the sovereign entity,” he said, referring to the invasion of Ukraine. “And I think history will judge this in the latter light.”
Finance Minister Anton Siluanov dismissed the situation on Thursday as a “farce.”
He reiterated the fact that, even though the conflict in Ukraine is raging, billions of dollars per week are still flowing into the state’s coffers through energy exports.
“Anyone can declare whatever they like,” Siluanov said. “But anyone who understands what’s going on knows that this is in no way a default.”
The grace period, which ended Sunday, prompted his comments. Investors failed to receive the coupon payments on euro and dollar-denominated bonds due May 27, which resulted in the 30-day grace period.
After the US Treasury closed a loophole in its sanctions, the cash became stuck. This was because it removed an exemption which had permitted bondholders from receiving payments from Russia’s sovereign. A week later, Russia’s paying agent, the National Settlement Depository, was also sanctioned by the European Union.
In response, Vladimir Putin introduced new regulations that say Russia’s obligations on foreign-currency bonds are fulfilled once the appropriate amount in rubles has been transferred to the local paying agent.
According to those rules, the Finance Ministry paid its most recent interest payments of approximately $400 million on Thursday and Friday. The terms of any underlying bonds are not able to be settled in the local currency.
So far, it’s unclear if investors will use the new tool and whether existing sanctions would even allow them to repatriate the money.
According to Siluanov, it makes little sense for creditors to seek a declaration of default through the courts because Russia hasn’t waived its sovereign immunity, and no foreign court would have jurisdiction.
“If we ultimately get to the point where diplomatic assets are claimed, then this is tantamount to severing diplomatic ties and entering into direct conflict,” he said. “And this would put us in a different world with completely different rules. We would have to react differently in this case — and not through legal channels.”
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