What’s impact of apparent Russian default on its foreign debt?
– Russia appeared to default on its foreign debt for the first time since the Bolshevik Revolution more than a century ago, further alienating the country from the global financial system following sanctions imposed over its war in Ukraine.
Moscow owed $100 million in interest on one bond priced in dollars and one priced in euros, which was originally due May 27. A 30-day grace period expired Sunday, but there has not been an official determination of a default yet.
“For all practical purposes, Russia is in default,” said Jay S. Auslander, a sovereign debt lawyer at the firm of Wilk Auslander in New York. “The 30-day grace period has expired. Bondholders do not have their money.”
Last month, the U.S. Treasury Department ended Russia’s ability to pay its billions in debt back to international investors through American banks. In response, the Russian Finance Ministry said it would pay dollar-denominated debts in rubles and offer “the opportuniWestern ty for subsequent conversion into the original currency.”
Russia says it has the money to pay its debts but Western sanctions created “artificial obstacles” by freezing its foreign currency reserves held abroad.
Kremlin spokesman Dmitry Peskov told reporters Monday that “there are no grounds to call this situation a default,” saying Russia has paid but it could not be processed because of sanctions.
The other side argues that “this happened because of sanctions, but sanctions were fully in your control,” Auslander said. “All of this was under your control, because all you had to do was not invade Ukraine.”
Russia owes about $40 billion in foreign bonds, about half of that to foreigners. Before the start of the war, Russia had around $640 billion in foreign currency and gold reserves, much of which was held overseas and is now frozen.
Russia has effectively been in default for months in the eyes of bond investors, said Liam Peach, an economist specializing in emerging European markets at Capital Economics.
Insurance contracts that cover RusLONDON sian debt have priced a 80% likelihood of default for weeks, and rating agencies like Standard & Poor’s and Moody’s have placed the country’s debt deep into junk territory.
The formal way to declare default is if 25% or more of bondholders say they didn’t get their money. Once that happens, provisions say all Russia’s other foreign bonds are also in default, and bondholders could then seek a court judgment to enforce payment.
In normal circumstances, investors and the defaulting government typically negotiate a settlement in which bondholders are given new bonds that are worth less but that at least give them some partial compensation.
But sanctions bar dealings with Russia’s finance ministry. And no one knows when the war will end or how much defaulted bonds could wind up being worth.
In this case, declaring default and suing “might not be the wisest choice,” Auslander said. It’s not possible to negotiate with Russia and there are so many unknowns, so creditors may decide to “hang tight for now.” sanctions over the war have sent foreign companies fleeing Russia and interrupted the country’s trade and financial ties with the rest of the world. Default would be one more symptom of that isolation and disruption.
A default would not affect the Russian economy right now because the country has not borrowed internationally in years amid sanctions and is making lots of money from exporting commodities like oil and natural gas, said Chris Weafer, a veteran Russian economy analyst at consulting firm Macro-Advisory.
But longer term, when the war has resolved and Russia tries to rebuild its economy, “this is where the legacy of default will be a problem. It’s a bit like if an individual or if a company gets a bad credit score, it takes years to get over that,” he said.
But a Russian default could have a ripple effect by adding pressure on global debt markets and making investors more risk averse and less willing to advance money, which “very well could lead to further defaults in other emerging markets,” Weafer said.