Russia has defaulted on its foreign debt for the first time since the Bolshevik Revolution after a 30-day grace period for the country to disburse two Eurobond interest payments expired on Sunday night.
It’s a largely symbolic move given that the Kremlin has enough money to pay off the debt, but is barred from doing so because of the heavy Western sanctions leveled on the government. Last month, the U.S. Treasury Department effectively blocked Moscow from making the payments by letting a sanctions loophole expire that had previously allowed it to transfer cash to debtholders via American banks.
Quote: “Anyone who understands this situation knows that this in no way a default,” Russian Finance Minister Anton Siluanov declared. “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.”
While a formal default (by a ratings agency or court) would be another sign of isolation, in this case it doesn’t mean much, as Russia currently cannot borrow internationally. In fact, it doesn’t need to, thanks to surging energy export revenues that have grown even more plentiful since the invasion of Ukraine. The grim status could influence its standing as an economic and financial pariah, however, as more multinationals flee the country or discourage foreign direct investment in the future.
Next steps: Bondholders are likely to take a wait-and-see approach. Claims only become void three years from now and much could change before then in terms of the scope of the war or sanctions. Debtholders may also have a difficult time repatriating the cash since the Kremlin hasn’t waived its sovereign immunity and no foreign court would have jurisdiction there. Note that Russia under Boris Yeltsin also defaulted on its domestic debts in 1998, which led to a wave of inflation and a devalued ruble, but the economy was able to recover quickly due to rising oil prices and international aid.