Russia appeared to be in default on its international debt on Monday as a grace period to make a payment expired, the latest sign of how isolated Russia has become from global financial markets as punishment for its invasion of Ukraine.
The additional period to pay about $100 million in euros and dollars ended on Sunday, 30 days after an initial May 27 deadline, as sanctions blocked Russia’s payment routes.
The statement of a standard event will have to come from investors, as rating agencies, which have been banned by sanctions from reporting on Russia, have not defaulted on Russia. Nor does the Credit Derivatives Determination Committee have a panel of investors that decides whether or not to pay out securities related to defaults. But it turned out that the payments had not yet arrived in the bondholders’ accounts by Sunday evening.
Russia’s finance ministry said before the deadline that Russia had fulfilled its obligations to investors and paid in rubles, even though most of Russia’s foreign-currency debt does not allow payments in rubles. Bloomberg and Reuters reported Monday that Russia had defaulted because the payment deadline had been exceeded, but Tass, Russia’s state news agency, later reported Monday that the government did not consider itself to be in default.
The risk of default arose in late February after Russia invaded Ukraine and imposed sanctions to separate the country from international financial markets. In late May, Russia tried to evade tougher sanctions that cut off access to US banks and bondholders by sending payments to a Moscow-based institution. In the end, the funds never made it into bondholders’ accounts.
Moscow will likely continue to insist it has not defaulted given its efforts to pay. The controversial nature of the default will make it difficult for investors to demand early payment of outstanding debts, which often happens after a default, while sanctions can make it nearly impossible to resolve the disagreement.
This default would be unusual because it would be a result of economic sanctions blocking transactions, not because the Russian government is out of money. Moscow’s finances remain strong after months of war, with nearly $600 billion in foreign exchange and gold reserves, although about half of that is frozen abroad. And Russia continues to receive a steady influx of money from oil and gas sales. Still, a default would tarnish the country’s reputation, likely making it more expensive to borrow from international markets if it regains access.
Unlike other major defaults in recent history, this one is unlikely to have a significant effect on international markets or local residents.
The head of Russia’s central bank, Elvira Nabiullina, said there would be no immediate consequences of default as there had already been an outflow of international investors and the value of Russia’s assets had fallen. In addition, the government can still pay Russians who own ruble-denominated bonds. The central bank is more concerned about inflation and supporting the economy through an exodus of foreign companies and investment.
Due to the sanctions alone, Russia is expected to be without access to large parts of the international capital markets for a long time. Regardless, Russia has been reluctant to give up its reputation as a reliable borrower, which was badly won after an economic crisis two decades ago when the government defaulted on ruble-denominated bonds.