For months, the country has found ways around the sanctions imposed after the Kremlin invaded Ukraine. But at the end of the day on Sunday, the grace period on about $100 million in frozen interest payments due May 27 expired, a period considered an event of default if missed.
It is a grim marker of the country’s rapid transformation into an economic, financial and political pariah. The country’s Eurobonds have been trading at distressed levels since early March, central bank foreign exchange reserves remain frozen and the biggest banks are separated from the global financial system.
But given the damage already done to the economy and markets, the default is also mostly symbolic for now, and matters little to Russians facing double-digit inflation and the worst economic contraction in years.
Russia has pushed back on the default designation, saying it has the funds to cover all bills and has been pressured into not paying. As it tried to get out of it, it announced last week that it would switch to servicing its $40 billion of ruble-denominated sovereign debt, criticizing a ‘force majeure’ situation which it said had been artificially manufactured by the West.
“It’s a very, very rare thing where a government that can otherwise afford it is forced by an outside government to default,” said Hassan Malik, senior sovereign analyst at Loomis Sayles & Company LP. “This will be one of the great watershed faults in history.”
A formal statement would usually come from rating agencies, but European sanctions have led them to withdraw ratings of Russian entities. According to the paperwork for the notes whose grace period expired on Sunday, holders can appeal one themselves if the owners of 25% of the outstanding bonds agree that an “event of default” has occurred.
With the last deadline passed, attention turns to what investors will do next.
They do not need to act immediately and may choose to watch the progress of the war in hopes that sanctions will eventually be eased. Time may be on their side: the debts do not lapse until three years after the date of payment, according to the surety documents.
“Most bondholders will keep the wait-and-see approach,” said Takahide Kiuchi, an economist at Tokyo’s Nomura Research Institute.
Russia’s default battle with bondholders has only just begun
During the Russian financial crisis and the ruble collapse of 1998, President Boris Yeltsin’s government defaulted on $40 billion of its local debt.
The last time Russia defaulted on its foreign creditors was more than a century ago, when the Bolsheviks under Vladimir Lenin repudiated the nation’s huge indebtedness to the Tsarist era in 1918.
By some measures, it approached a trillion dollars in today’s money, according to Malik de Loomis Sayles, who is also the author of “Bankers and Bolsheviks: International Finance and the Russian Revolution.”
By comparison, foreigners held nearly $20 billion worth of Russian Eurobonds in early April.
Russia’s debt held abroad is below 50%, for the first time since 2018: chart
“Is it a valid excuse to say, ‘Oh, the sanctions prevented me from paying, so it’s not my fault?'” Malik said.
“The larger problem is that the sanctions were themselves a response to action by the sovereign entity,” he said, referring to the invasion of Ukraine. “And I think history will judge it that way.”
Finance Minister Anton Siluanov on Thursday called the situation a “farce”.
As billions of dollars a week continue to flow into state coffers from energy exports, despite the bitter conflict in eastern Ukraine, he reiterated that the country has the means and willingness to pay.
“Anyone can declare whatever they want,” Siluanov said. “But anyone who understands what’s going on knows that’s by no means a fault.”
His comments were prompted by the grace period that ended on Sunday. The 30-day window was triggered when investors failed to receive coupon payments due on dollar and euro-denominated bonds on May 27.
The money was trapped after the US Treasury let a sanctions loophole expire, removing an exemption that had allowed US bondholders to receive payments from the Russian ruler. A week later, Russia’s paying agent, the National Settlement Depository, was also sanctioned by the European Union.
In response, Vladimir Putin introduced new regulations that Russia’s obligations on foreign currency bonds are fulfilled once the appropriate amount in rubles has been transferred to the local paying agent.
The Department of Finance made its final interest payments, equivalent to about $400 million, under those rules on Thursday and Friday. However, none of the underlying bonds have terms that allow settlement in local currency.
So far, it is unclear whether investors will use the new tool and whether the existing sanctions would even allow them to repatriate the money.
According to Siluanov, it makes little sense for creditors to seek a declaration of default through the courts because Russia has not waived its sovereign immunity and no foreign court would have jurisdiction.
“If we finally get to the point where diplomatic assets are claimed, that amounts to severing diplomatic relations and entering into direct conflict,” he said. “And that would put us in a different world with completely different rules. We would have to react differently in this case – and not through legal channels.”
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