Russia missed a deadline to make bond payments on Sunday, a move indicating it is defaulting on international debt for the first time in more than a century after Western sanctions thwarted the government’s efforts to pay foreign investors. The decline adds to efforts to cut off Moscow from global capital markets for years.
About $100 million in dollar and euro interest payments failed to reach investors within a 30-day grace period after a missed May 27 deadline. The postponement period ended on Sunday evening.
A formal declaration of default should come from bondholders, as rating agencies, which normally report when borrowers have defaulted, are banned from reporting on Russia by sanctions. The Credit Derivatives Determinations Committee, a panel of investors that decides whether or not to pay out securities related to defaults, has not yet been asked to make a decision on these bond payments.
But as it turned out, payments hadn’t arrived in bondholders’ accounts by Sunday evening, as required by the bonds’ contracts. On Monday, Russia’s finance ministry said it made the payments in May and transferred them to Euroclear, a Brussels-based clearinghouse, but then blocked it from reaching bondholders.
Russia rejects the default statement because it has made efforts to pay. Kremlin spokesman Dmitri S. Peskov told reporters Monday that the statements about the omission were “absolutely illegal”.
“The fact that Euroclear withheld this money did not transfer it to the recipients, it is not our problem,” said Mr Peskov. “In other words, there are no reasons to call this situation a default.”
The Treasury Department added that the actions of foreign financial institutions are beyond its control and “it seems advisable for investors to contact the relevant financial institutions directly” about the payments.
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. But in the end, the funds did not quite make it into bondholders’ accounts due to far-reaching US and European sanctions.
This omission is unusual because it is the result of economic sanctions blocking transactions, not because the Russian government is out of money. Moscow’s finances remain resilient 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 be a blemish on the country’s reputation that will linger in investors’ minds and likely drive up borrowing costs if it is able to tap into international capital markets.
Unlike other major defaults in recent history, such as in Greece and Argentina, the immediate economic and financial impact of this default on international markets and the Russian budget is expected to be relatively small.
First, Russia has already lost access to international investors, traditionally the worst consequence of default.
“The only clear negative outcome of the bankruptcy is that the external market is effectively closed to the Ministry of Finance,” said Sofya Donets, an economist at Renaissance Capital in Moscow. “But it’s already closed.”
Ivan Nechepurenko and Andrés R. Martinez reporting contributed.
