Russia is defaulting on its international bonds for the first time in more than a century, the White House said, as radical sanctions have cut the country off from the global financial system, making its assets untouchable.
The Kremlin, which has the money to make payments thanks to oil and gas revenues, quickly dismissed the allegations and has accused the West of leading it to artificial default.
Earlier, some bondholders said they had not received interest due on Monday after the expiration of a key payment deadline on Sunday.
Russia has struggled to keep payments of $ 40 billion in outstanding bonds since the invasion of Ukraine on February 24th.
“This morning’s news of Russia’s failure to pay for the first time in more than a century places the strength of the actions the US has taken, along with allies and partners, as well as the dramatic impact it has had on Russia’s economy, ”the U.S. official said on the sidelines of a G7 summit in Germany.
Russia’s efforts to avoid what would be its first major breach of international bonds since the Bolshevik revolution more than a century ago encountered an obstacle in late May when the Office for the Control of Foreign Assets (OFAC ) of the US Treasury Department effectively blocked Moscow from making payments.
“Since March we thought that a default by Russia is probably inevitable, and the question was when,” Dennis Hranitzky, head of sovereignty litigation at law firm Quinn Emanuel, told Reuters before Sunday’s deadline.
“OFAC has intervened to answer this question for us, and now it’s up to us to default.”
A formal default would be largely symbolic given that Russia cannot borrow internationally at this time and does not need it thanks to abundant oil and gas export earnings. But the stigma would likely increase its borrowing costs in the future.
The payments in question are $ 100 million in interest on two bonds, one denominated in US dollars and another in euros, which Russia was due to pay on May 27. Payments had a 30-day grace period, which expired Sunday.
Russia’s finance ministry said it had made payments to its land-based National Settlement Deposit (NSD) in euros and dollars, adding that it had fulfilled its obligations.
In a call with reporters, Kremlin spokesman Dmitry Peskov said the fact that payments had been blocked by Euroclear due to Western sanctions on Russia “is not our problem.”
The Euroclear clearing house did not respond to a request for comment.
Some Taiwanese bondholders had not received payments on Monday, sources told Reuters.
Without an exact deadline specified in the brochure, lawyers say Russia could have until the end of the next business day to pay these bonds.
Credit rating agencies usually formally downgrade a country’s credit rating to reflect default, but this does not apply in the case of Russia, as most agencies no longer value the country.
LEGAL CONFUSION
The legal situation surrounding the bonds seems complex.
Russia’s bonds have been issued with an unusual variety of terms and a growing level of ambiguity for the most recently sold, as Moscow was already facing sanctions for its annexation of Crimea in 2014 and a poisoning incident in Great Britain in 2018.
Rodrigo Olivares-Caminal, a professor of banking and financial law at Queen Mary University in London, said it was necessary to clarify what a discharge for Russia entailed from its obligation or the difference between receiving and recovering payments.
“All these issues are subject to the interpretation of a court,” Olivares-Caminal told Reuters.
Somehow, Russia has already been in default.
A derivatives committee has ruled that there has been a “credit event” in some of Russia’s securities, which led to a payment of some of Russia’s default credit swaps, instruments used by investors to insure against non-payment of debt.
This was triggered because Russia failed to make a $ 1.9 million in interest accrued payment on a payment that was due in early April.
Until the invasion of Ukraine, a sovereign default seemed unthinkable, as Russia had an investment grade rating shortly before that point. A default would also be unusual, as Moscow has the funds to pay off its debt.
The U.S. Treasury OFAC had issued a temporary exemption, known as General License 9A, in early March to allow Moscow to continue paying investors. The United States let the waiver expire on May 25, as Washington tightened sanctions on Russia, effectively cutting payments to U.S. investors and entities.
The expiration of the OFAC license is not the only obstacle in Russia. In early June, the European Union imposed sanctions on the NSD, the agent designated by Russia for its Eurobonds.
Moscow has tried in recent days to find ways to deal with upcoming payments and avoid default.
President Vladimir Putin last Wednesday signed a decree to initiate temporary proceedings and give the government 10 days to choose banks to handle payments under a new scheme, suggesting Russia will consider meeting its debt obligations when it pays holders of bonds in rubles and on land in Russia.
“Russia saying it is complying with its obligations under the terms of the link is not the whole story,” Zia Ullah, a partner and head of corporate crime and investigations at the law firm Eversheds Sutherland, told Reuters.
“If you as an investor are not satisfied, for example, if you know that the money is stuck in a guarantee account, which would effectively be the practical impact of what Russia says, the answer would be, until you meet the obligation, they have not fulfilled the conditions of the guarantee ”.
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