Blocked payments force Russia into ‘default’
Moscow says debts paid but sanctions create ‘farce’ that halts movement of its money
Russia has acknowledged that two interest payments on its debt did not make it to creditors, an event which could be considered a default, even if Moscow disputes such an interpretation.
What happens next?
Russia had been expected to pay US$100 million in interest on its debt on May 27 and the one-month grace period on the payment expired on Sunday.
The Russian finance ministry said it paid the money on May 20.
But it acknowledged on Monday that the money did not reach creditors as banking intermediaries blocked the transfers because of Western sanctions imposed on Moscow over the war in Ukraine.
The United States has since the end of May blocked Moscow from paying its dollar debts.
Traditionally, credit ratings agencies make such determinations. On Monday, rating agency Moody’s said that Russia had defaulted on its international debts “under our definition”.
“Further defaults on future coupon payments are likely,” it said.
But it is likely to fall to the Credit Derivatives Determinations Committee, a committee of creditors, to make the official determination on whether Russia missed the payments and whether this constitutes a default.
The committee already acknowledged earlier this month that Russia did not make US$1.9 million in penalty interest payments concerning a different payment due. It plans to meet today to discuss the missed May 27 payment.
It is also the committee which decides whether to trigger payment of credit default swaps, financial products designed to serve as insurance for creditors against default.
Moscow argued that the fact that creditors did not receive their money was not of the result of its failure to make the payment, but the actions of third parties, thus there was no default on its part.
Russia called the predicament a “farce” and accused the West of pushing an “artificial” default.
Russia’s last default on its foreign debt was in 1918, when Bolshevik leader Vladimir Lenin repudiated Tsarist-era debts.
In case a default is declared “Russia won’t be able to borrow in foreign currencies,” said Slim Souissi, a researcher at the Institute of Business Administration at the University of Caen-Normandy in France.
“In the short term, it will have trouble raising funds on international markets” and this could last for years, said Souissi, who previously worked as a financial analyst at Fitch.
Liam Peach, Emerging Europe Economist at Capital Economics, played down the impact of a default determination, as Western sanctions were already blocking Russia’s access to international capital markets.
Normally, a default can have serious consequences.
Argentina’s decision to freeze payment on US$100 billion in debt in 2001 triggered a deep economic, political and social crisis.
But with sanctions again blocking Russian access to many markets, Peach said default would be a “largely symbolic event” unlikely to have an additional macroeconomic impact.