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

After months on the brink 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’s invasion of Ukraine.

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The grace period on nearly $100 million of missed bond payments — blocked because of broader sanctions — expires on Sunday night. There won’t be an official announcement, and Russia is already disputing the designation, but if investors don’t have the money by the deadline, there will be an “event of default” on Monday morning, according to bond documents.

This is largely a symbolic development for now, given that Russia is already an economic, financial and political outcast in much of the world. But it shows that while the US, Europe and others have tightened the screws since the invasion began in February, it is impossible for Russia to do what would otherwise be normal financial business.

For Russia, it would mark its first foreign default since the Bolsheviks rejected Tsarist-era loans in 1918. The country was very close to such a moment earlier this year, but managed to avoid the last-ditch by switching payment methods. That alternative route was closed later in May – just days before $100 million was owed – when the US closed the sanctions loophole that allowed US investors to receive sovereign bond payments. .

The question now is what happens next, as markets face the unique scenario of a defaulting borrower who has the willingness and resources to pay, but cannot.

Major rating agencies are usually the ones to issue default declarations, but sanctions prevent them from doing Russian business. Bondholders can group together to make their statement, but they may prefer to wait to monitor the level of war and sanctions in Ukraine as they try to explore the possibility of getting their money back, or less. At least some of it.

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

As penalties on Russian officials, banks and individuals increasingly cut off payment routes, Russia has argued that it met its obligations to creditors by transferring May payments to a local payment agent, even though investors have funds. Don’t be Accounts.

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

Finance Minister Anton Siluanov has called the situation a “farce”, citing an “unforeseen event” as justification for the currency switch. According to lawyers who spoke to Bloomberg earlier this month, the legal argument for coercion has historically not included sanctions.

“There is every basis to suggest that artificially preventing the Russian Federation from repaying its foreign sovereign debt, aiming to invoke the label of ‘default’,” Siluanov said on Thursday. “Anyone can declare their choice and try to apply such a label. But anyone who understands the situation knows that it is by no means the default.”