Russia has defaulted on its foreign debt for the first time since the 1917 revolution, according to reports, further alienating the country from the global financial system after sanctions imposed over its war in Ukraine.
The country missed a Sunday evening deadline to meet a 30-day grace period on interest payments of $100 million on two Eurobonds originally due on May 27, Bloomberg reported Monday morning.
Some Taiwanese holders of Russian Eurobonds said on Monday they had not received interest payments due, two sources told Reuters.
Official confirmation of the default was to come from international rating agencies.
Russia’s efforts to avoid what would be its first major default on international bonds since the Bolshevik Revolution more than a century ago hit an insurmountable hurdle in late May when the US Treasury Department’s Office of Foreign Assets (OFAC) effectively prevented Moscow from making payments.
“Since March, we thought a Russian default was probably inevitable, and the question was when,” Dennis Hranitzky, head of sovereign litigation at law firm Quinn Emanuel, told Reuters. “OFAC stepped in to answer that question for us, and the default is now on us.”
While a formal default would be largely symbolic given that Russia cannot borrow internationally at the moment and needs it thanks to abundant oil and gas export revenues, the stigma would likely increase its costs. borrowing in the future.
Russia, which has offered to pay debts in roubles, calls any default artificial because it has the money to pay its debts but says the sanctions have frozen its foreign currency reserves held abroad.
“It’s a very, very rare thing where a government that can otherwise afford it is forced by an outside government to default,” Hassan Malik, senior sovereign analyst at Loomis Sayles, told Bloomberg. “That will be one of the great flaws of the story.”
“There is money and there is also the will to pay,” Russian Finance Minister Anton Siluanov said last month. “This situation, artificially created by a hostile country, will have no effect on the quality of life of Russians.”
Tim Ash, senior emerging markets sovereign analyst at BlueBay Asset Management, tweeted that the default “clearly isn’t” out of Russia’s control and that sanctions are preventing it from paying its debts because it invaded Europe. ‘Ukraine.
Russia owes about $40 billion in foreign bonds. Prior to the start of the war, Russia had about $640 billion in foreign exchange and gold reserves, much of which was held overseas and is now frozen.
Russia has not defaulted on its international debts since the revolution more than a century ago, when the Russian Empire collapsed and the Soviet Union was created.
Russia defaulted on its domestic debts in the late 1990s, but was able to recover from this default with the help of international aid.
Investors have been expecting Russia to default for months. Insurance contracts that cover Russian debt have rated an 80% probability of default for weeks, and rating agencies such as Standard & Poor’s and Moody’s have put the country’s debt deep in junk territory.
Once a country defaults, it may be cut off from borrowing in the bond market until the default is resolved and investors regain confidence in the government’s ability and willingness to pay. But Russia has already been cut off from Western capital markets, so any return to borrowing is far from the case anyway.
The Kremlin can still borrow rubles at home, where it relies mainly on Russian banks to buy its bonds.
War-related Western sanctions have driven foreign companies to flee Russia and cut off the country’s trade and financial ties with the rest of the world. The defect would be one more symptom of this isolation and this disturbance.
Investment analysts cautiously believe that a Russian default would not have the kind of impact on global financial markets and institutions that its default on domestic debt did in 1998. At the time, Russia’s default Russia’s payment on national ruble bonds led the US government to step in and get the banks to bail out Long-Term Capital Management, a large US hedge fund whose collapse, it was feared, could have shaken the whole of the financial and banking system.