Russia has suffered a debt default as some of the Russian bondholders said Moscow has missed a June 27 deadline for making overdue interests. Russia owes $40 billion in foreign bonds, and has been struggling to make interest payments ever since the US Treasury blocked processing those payments through American banks.
Russia has squarely blamed the Western sanctions for the default, which is largely symbolic considering that Moscow has the money to pay. "There is money and there is also the readiness to pay ... .This situation, artificially created by an unfriendly country, will not have any effect on Russians' quality of life," Russian Finance Minister Anton Siluanov said last month.
How Did the US Force a Russian Default?
The US treasury Department froze foreign currency reserves held by the Russian central bank at US financial institutions as part of the sanctions imposed on Moscow after the Ukraine war started. The Treasury Department did give a waiver in the initial months after the sanctions, allowing Russia to use the funds to make coupon payments on dollar-denominated sovereign debt on a case-by-case basis.
However, this arrangement was withdrawn by the US at the beginning of April, when a large tranche of such payment came up, including a $552.4 million principal payment on a maturing bond.
What Does the Default Mean?
The Russian debt default is a historic first in more than a 100 years and therefore is a huge reputational damage to Moscow. However, in reality, it is largely symbolic given that Russia has the money to pay. Moscow sits on a huge reserve stash thanks to its enormous oil and gas revenues.
A debt default directly cripples a nation's creditworthiness and affects its ability to raise external loans in the future at normal rates. Russia is in no need of raising funds at the moment, and hence a default does not have critical negative impact at the moment.
Even if Russia wanted to access international borrowing markets currently, that would be impossible due to the Western sanctions over the Ukraine war. However, a default is still hurtful to Russia as it will raise borrowing costs in the future.
Will Russia Pay Up?
Russia's foreign bond liabilities amount to $40 billion, but the default in question relates to $100 million in interest on two bonds. One of these is US dollar denominated bond and the other is in euros. The payments were due on May 27, but there was a grace period of one month tot execute the payment.
According to Russia's finance ministry, the payments have been made to the onshore National Settlement Depository (NSD) in euros and dollars. According to Russia it has fulfilled the payment obligation. However, some Taiwanese holders of the bonds did not receive the payment on Monday, pushing Moscow into default, Reuters reported.
According to the agency, lawyers are of the view that Russia has until the end of the following business day to honor the payments to the bondholders.
How Will Russia Manage the Bond Payment Crisis?
It was reported in May that Russia was planning to circumvent the western sanctions that threaten to destroy its credit rating. The plan was to allow foreign investors to open accounts in both rubles and a foreign currency in a Russian bank.
The proposed bond-payment mechanism, which is a mirror image of the system in place for facilitating the natural gas exports, will help Russia avoid a default. Russian Finance Minister Anton Siluanov unveiled the new plan in an interview with the Vedomosti newspaper, according to Bloomberg.
"This is how it works for gas payments: we get foreign currency, then it is converted to rubles ... The Eurobond settlement mechanism will operate in the same way, but in the opposite direction," the minister said.
Can Russia Take Legal Action?
In April, the Russian finance ministry said it will initiate legal action if the country is 'forced' into a default on its sovereign debt. Finance Minister Siluanov said the country will certainly sue the detractors since Moscow is sure that it has taken "all the necessary steps to ensure that investors receive their payments."
"We will present in court our bills confirming our efforts to pay both in foreign currency and in roubles. It will not be an easy process. We will have to very actively prove our case, despite all the difficulties," Siluanov told reporters on Monday, according to Reuters.
The Russian finance ministry has categorically stated that the Russian federation has the funds to make the payments on its sovereign bonds and the scenario of a default is a western manufactures one.
However, such a the legal fight will be painstaking. In making the legal challenge Russia has solidified its resoluteness to fight the Western dominance. But the verbal escalation apart, the prognosis is negative for Moscow in the near term.
In April, rating agency S&P Global downgraded Russia's foreign currency payments to a 'selective default'. Analysts expect tougher sanctions in the future if the Ukraine war drags on, and this will continue to cripple Russia's credit standing. Though Russia does have the funds and the willingness to honor the terms and conditions of its foreign debt, technical lacunae and obstacles will indeed hurt its rating.
