FIRST TIME SINCE 1918

Russia has defaulted on its foreign debt for the first time in more than a century, reports say
Huileng Tan
Mon, June 27, 2022 

Russian Finance Minister Anton Siluanov and President Vladimir Putin have slammed sweeping sanctions against the country.Olga Maltseva/AP

Russia missed a Sunday deadline to pay $100 million in interest on two foreign-currency bonds.


Russia has the money to pay, but sanctions are blocking payments from moving through the global system.

Russia last defaulted on its foreign debt in 1918 during the Bolshevik Revolution.

Russia has defaulted on its foreign debt for the first time in more than a century as the country can't pay creditors due to sanctions over the war in Ukraine, according to media reports.

The country missed a deadline to pay $100 million in dollar- and euro-denominated interest on two foreign-currency bonds on Sunday, The Wall Street Journal reported, citing bondholders. Some Taiwanese holders of Russian bonds also did not receive interest due by the deadline, Reuters reported citing two sources.

Russia said it has sent the money to Euroclear for distribution to investors, but the payment seems to be held up there, the BBC reported. Euroclear would not say whether the distribution had been blocked, and said it follows all sanctions, the report said.

In May, the US Treasury ended a key sanctions exemption that allowed Russian sovereign bond payments to pass through to US investors. In response, Russia said it would start using rubles to pay down dollar bond payments.

Moscow said it had sent the Eurobond payments to the country's National Settlement Depository, Reuters reported last week. But the bonds' covenants do not allow for payments in rubles, which means the payments would still constitute a default.

It's also unclear how bondholders can access the ruble payments, as Russia's National Settlement Depository has been sanctioned by the EU.

This marks Russia's first default on its foreign debt since 1918, when, during the Bolshevik Revolution, communist leader Vladimir Lenin repudiated the debt of the Tsarist era.

But Russia isn't defaulting this time around because it doesn't have the money to pay; its finances are holding up well currently, thanks to soaring energy prices. Instead, the default comes as sweeping US and European Union sanctions are blocking its bond interest payments from moving through the international payments system.

Up until Sunday, Russia had been making good on its bond payments even amid sweeping sanctions. But markets have been expecting the country to eventually default on its foreign bonds as international trade restrictions intensify.

To counter the situation, President Vladimir Putin signed a decree on Wednesday to handle payments on foreign bonds under a new program — which signals that Moscow considers the interest paid, even when payments are made in rubles, Reuters reported. Russia has about $40 billion in outstanding foreign currency payments.
Russia says it's not a default

Formal default declarations are typically issued by credit rating agencies, but the big three agencies — S&P, Moody's and Fitch — have all withdrawn ratings on Russian entities due to sanctions.

Russia has hit back against what it called a "force-majeure situation," with finance minister Anton Siluanov calling the situation a "farce," Bloomberg reported last Thursday.

"Anyone can declare whatever they like," Siluanov said in an emailed statement to Bloomberg last week. "But anyone who understands what's going on knows that this is in no way a default."

Russia made the bond payments it made in May, and the fact Western sanctions were holding them up at Euroclear is "not our problem", a Kremlin spokesperson said, per Reuters.

Russia may still have until the end of the day on Monday to pay up, as there's no exact deadline specified in the bonds' prospectus, lawyers told Reuters.

And while Russia may still be able to get the money through the financial institution to bondholders, "the overwhelming probability is they won't be able to, because no bank is going to move the money," Jay S. Auslander, a top sovereign debt lawyer at Wilk Auslander, told the Associated Press.

The impact of Russia's debt default on the world's financial systems would be limited, as the country doesn't have extensive financial links globally, Insider's Harry Robertson reported in March.

Russia's foreign debts are pretty low compared to the size of its economy, so a default is unlikely to severely affect the country now. However, a default would impact Russia's credit trustworthiness, making it harder for the country to borrow on the international markets in the future.

Russia Is Hours Away From Its First Foreign Default in a Century

Giulia Morpurgo
Sun, June 26, 2022

(Bloomberg) -- After months of teetering on the edge of default, Russia is now just hours away from a dramatic moment in the financial battle that the US and others have waged against the Kremlin over its invasion of Ukraine.

A grace period on about $100 million of missed bond payments -- blocked because of wide-ranging sanctions -- ends on Sunday night. There won’t be an official declaration, and Russia is already disputing the designation, but if investors don’t have their money by the deadline, there will be an “event of default” on Monday morning, according to the bond documents.

It’s largely a symbolic development for now, given that Russia is already an economic, financial and political outcast across most of the world. But it showcases how the US, Europe and others have tightened the screws since the invasion started in February to make it all-but impossible for Russia to conduct what would otherwise be normal financial business.

For Russia, it will mark its first foreign default since the Bolshevik repudiation of Czarist-era debts in 1918. The country tipped very near to such a moment earlier this year, but managed a last-ditch escape by switching payment methods. That alternative avenue was subsequently shut off in May -- just days before the $100 million was due -- when the US closed a sanctions loophole that had allowed American investors to receive sovereign bond payments.

Now the question is what happens next, as markets are faced with the unique scenario of a defaulted borrower which has the willingness and resources to pay, but can’t.

Major ratings agencies would usually be the ones to issue a default declaration, but sanctions bar them from Russian business. Bondholders could group together to make their own statement, but they may prefer to wait to monitor the war in Ukraine and the level of sanctions as they try to figure out the chance of getting their money back, or at least some of it.

“A declaration of default is a symbolic event,” said Takahide Kiuchi, an economist at Nomura Research Institute in Tokyo. “The Russian government has already lost the opportunity to issue dollar-denominated debt. Already as of now, Russia can’t borrow from most foreign countries.”

As the penalties on Russian authorities, banks and individuals have increasingly cut off payment routes, Russia has argued that its met its obligations to creditors by transferring the May payments to a local paying agent, even though investors don’t have the funds in their own accounts.

Earlier this week, it made other transfers in rubles, despite the fact that the bonds in question don’t allow that payment option.

Finance Minister Anton Siluanov has cited “force-majeure” as a justification for the currency switch, calling the situation a “farce.” The legal argument of force majeure hasn’t historically encompassed sanctions, according to lawyers who spoke to Bloomberg earlier this month.

“There is every ground to suggest that in artificially barring the Russian Federation from servicing its foreign sovereign debt, the goal is to apply the label of ‘default’,” Siluanov said Thursday. “Anyone can declare whatever they like and can try to apply such a label. But anyone who understands the situation knows that this is in no way a default.”