Russia defaulted on its foreign-currency sovereign debt for the first time in a century, the culmination of ever-tougher Western sanctions that shut down payment routes to overseas creditors.
For months, the country found paths around the penalties imposed after the Kremlin’s invasion of Ukraine. At the end of the day on Sunday, the grace period on about $100 million of snared interest payments due May 27 expired, a deadline considered an event of default if missed.
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.
Given the damage already done to the economy and markets, the default is also mostly symbolic for now, and matters little to Russians dealing with double-digit inflation and the worst economic contraction in years.
Russia has pushed back against the default designation, saying it has the funds to cover any bills and has been forced into non-payment. 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.”
A formal declaration would usually come from ratings firms, but European sanctions led to them withdrawing 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 percent of the outstanding bonds agree that an “Event of Default” has occurred.
With the final deadline passed, focus shifts to what investors 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. Time may be on their side: the claims only become void three years on from the payment date, according to the bond documents.
“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.
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.
“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.”
