Russia missed the bond payment deadline on Sunday. This is a move that marks the first default of international debt for more than a century after Western sanctions have hampered the government’s efforts to pay foreign investors. This revocation is in addition to efforts to block Moscow from the world’s capital markets for years.
After the May 27 deadline, investors did not receive interest payments in $ 100 million and euros within the 30-day grace period. The grace period ended on Sunday night.
A formal declaration of default must be submitted by the bondholder, as the rating agencies that the borrower declares when defaulting are usually prohibited by sanctions on Russia. The Credit Derivatives Decision Board, a committee of investors that decides whether to pay securities related to defaults, has not yet been asked to make a decision on the payment of these bonds.
However, as of Sunday night, payments did not appear to reach the bondholder’s account, as required by the bond contract. On Monday, the Russian Treasury said it made a payment in May and sent it to Brussels-based clearinghouse Euroclear, but was subsequently blocked from contacting bondholders.
Russia has rejected the default declaration because of its efforts to pay. Kremlin spokesman Dmitry S. Peskoff told reporters Monday that his remarks about default were “absolutely illegal.”
“The fact that Euroclear withheld this money didn’t send it to the recipient. It’s not our problem,” Peskoff said. “In other words, there is no reason to call this situation the default.”
The Treasury added that the behavior of foreign financial institutions is beyond that control and that “it seems wise for investors to contact the relevant financial institution directly” regarding payments.
The risk of default emerged in late February after Russia invaded Ukraine and imposed sanctions to separate the country from the international financial markets. In late May, Russia sought to take strict sanctions to block access to US banks and bondholders by sending payments to Moscow-based institutions. In the end, however, due to widespread US and European sanctions, the funds did not reach the bondholders’ accounts completely.
This default is unusual not because the Russian government has run out of funds, but because economic sanctions have blocked transactions. Moscow’s finances are resilient after several months of war, with foreign currency and gold reserves of about $ 600 billion, about half of which are frozen abroad. And Russia continues to receive a steady inflow of cash from oil and gas sales. Still, defaults will remain in investors’ memory and will taint the reputation of the country, which would probably push up borrowing costs if the international capital markets were available.
Unlike other major defaults in recent history, such as Greece and Argentina, the immediate economic and financial impact of this default on international markets and Russian budgets is expected to be relatively small.
For one thing, Russia has already lost access to international investors, which has traditionally been the worst result of default.
“The only obvious negative consequence of the default is that the external market is effectively closed for the Treasury,” said Sophia Donets, economist at Renaissance Capital in Moscow. “But it’s already closed.”
Ivan Nechepurenko When Andre R. Martinez Report that contributed.
