Russia has reportedly defaulted on its foreign debt for the first time since the 1917 revolution, further alienating the country from the global financial system following sanctions imposed by its war on Ukraine.
The country breached the Sunday night deadline to meet a 30-day grace period for the $ 100 million interest payments initially scheduled for May 27, Bloomberg reported Monday morning.
Russia considers any default to be artificial because it has the money to pay off its debts, but says sanctions have frozen its foreign exchange reserves.
“It’s a very, very rare thing where a government that otherwise has the means is forced by an outside government into default,” Hassan Malik, a senior sovereign analyst at Loomis Sayles, told Bloomberg. “It will be one of the great defaults in history.”
Last month, the U.S. Treasury Department put an end to Russia’s ability to pay off its billions of debts to international investors through U.S. banks. In response, the Russian finance ministry said it would pay off dollar-denominated debts in rubles and offer “the opportunity for subsequent conversion to the original currency.”
“There is money and there is also availability 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, a senior emerging market analyst at BlueBay Asset Management, tweeted that the default is “clearly not” out of Russia’s control and that sanctions prevent it from paying its debts because it invaded Ukraine.
Russia owes about $ 40 billion in foreign bonds. Before the start of the war, Russia had about $ 640 billion in foreign exchange and gold reserves, much of which was kept abroad 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 were expected to default on Russia for months. Insurance contracts covering Russian debt are priced at an 80% chance of default for weeks, and rating agencies such as Standard & Poor’s and Moody’s have placed the country’s debt in scrap territory.
Rating agencies may downgrade the default rating or a court may decide the issue.
Once a country defaults, bond market indebtedness can be cut until default is resolved and investors regain confidence in the government’s ability and willingness to pay. But Russia has already cut itself off from Western capital markets, so any return on lending is a long way off anyway.
The Kremlin can still borrow rubles at home, where it depends mainly on Russian banks to buy their bonds.
Western sanctions for the war have sent foreign companies to flee Russia and disrupted the country’s trade and financial ties with the rest of the world. The defect would be another symptom of this isolation and disruption.
Investment analysts cautiously calculate that a default by Russia would not have the kind of impact on global financial markets and institutions that resulted from its default on domestic debt in 1998. At the time, Russia’s default on bonds rubles led the US government to intervene and get banks to rescue Long-Term Capital Management, a large US hedge fund whose collapse, it was feared, could have shaken the financial and banking system further. wide.