Russia defaulted on its foreign currency sovereign debt for the first time in a century, the culmination of sometimes tough Western sanctions that closed payment routes to foreign creditors.
For months, the country searched for a way around the penalties imposed after the Kremlin’s invasion of Ukraine. But at the end of the day on Sunday, May 27, the grace period for nearly $100 million of stranded interest payments due has expired, a deadline considered to be an event of default.
It is a grim marker in the country’s rapid change in economic, financial and political exclusion. The country’s Eurobonds have traded at distressed levels since early March, with central bank foreign reserves frozen, and the largest banks cut off 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 means little for Russians dealing with double-digit inflation and the worst economic contraction in years.
Russia has pushed back against the default designation, saying it has the funds to cover any bills and has been forced into non-payment. As it tried to turn its way, it announced last week that it would switch to servicing its $40 billion outstanding sovereign debt in rubles, criticizing an “unforeseen” situation that it said artificially was built by the West.
“It’s a very rare thing where a government that would otherwise have the means is forced into default by an outside government,” said Hasan Malik, senior sovereign analyst at Loomis Salles & Co. LP. “This is going to be one of the big watershed defaults in history.”
A formal announcement usually comes from rating firms, but European sanctions prompted them to withdraw ratings on Russian entities. According to documents for notes whose grace period expired on Sunday, holders can call themselves if owners of 25% of the outstanding bonds agree that an “event of default” has occurred.
With the deadline passed, investors are focused on what to do next.
They are not required to act immediately, and may choose to monitor the progress of the war in the hope that sanctions will eventually ease. Time may be on their side: According to bond documents, claims become void only after three years from the date of payment.
“Most bondholders will take a wait-and-see approach,” said Takahide Kiuchi, an economist at the Nomura Research Institute in Tokyo.
During Russia’s financial crisis of 1998 and the collapse of the ruble, President Boris Yeltsin’s government defaulted on $40 billion of its local debt.
The last time Russia fell into default compared to its foreign creditors was more than a century ago when the Bolsheviks under Vladimir Lenin rejected the country’s staggering Tsarist-era debt load in 1918.
According to Loomis Salles Malik, who is also the author of ‘Bankers and the Bolsheviks: International Finance and the Russian Revolution’, by some measures it came close to a trillion dollars in today’s money.
By comparison, foreigners had the equivalent of Russia’s Eurobonds worth about $20 billion as of early April.
“Is it fair to say: ‘Oh well, sanctions kept me from paying, so it’s not my fault’?” Malik said.
“The broader issue is that the sanctions were a reaction to an action on the part of the sovereign entity itself,” he said, referring to the invasion of Ukraine. “And I think history will judge it in the light of the latter.”
Finance Minister Anton Siluanov on Thursday dismissed the situation as a “spectacle”.
Despite the peace conflict in eastern Ukraine, billions of dollars are still pouring into the state coffers from energy exports, he reiterated that the country has the means and the will to pay.
“Anyone can declare whatever he likes,” said Siluanov. “But anyone who understands what is happening knows that this is by no means the default.”
His comments were prompted by a grace period that ended on Sunday. The 30-day window began when investors failed to receive coupon payments on May 27 due to dollar- and euro-denominated bonds.
Cash stuck after the US Treasury ended sanctions loopholes, removing an exemption that allowed US bondholders to receive payments from the Russian sovereign. A week later, Russia’s payment agent, the National Settlement Depository, was also approved by the European Union.
In reply, Vladimir Putin New regulations were introduced that mandate that Russia’s obligations on foreign currency bonds are met once the appropriate amount in rubles is transferred to a local payment agent.
The finance ministry made its latest interest payments under those rules on Thursday and Friday, the equivalent of about $400 million. However, none of the underlying bonds have terms that allow settlement in the local currency.
As of now, it is not clear whether investors will use the new instrument and whether the current restrictions will also allow them to return the funds.
According to Siluanov, there is no point for creditors to declare default through the courts because Russia has not waived its sovereign immunity, and no foreign court would have jurisdiction.
“If we eventually get to the point where diplomatic property is claimed, it is tantamount to breaking off diplomatic ties and entering a direct conflict,” he said. “And it would put us in a different world with completely different rules. We would have to respond differently to this matter – not by legal means.”
For months, the country searched for a way around the penalties imposed after the Kremlin’s invasion of Ukraine. But at the end of the day on Sunday, May 27, the grace period for nearly $100 million of stranded interest payments due has expired, a deadline considered to be an event of default.
It is a grim marker in the country’s rapid change in economic, financial and political exclusion. The country’s Eurobonds have traded at distressed levels since early March, with central bank foreign reserves frozen, and the largest banks cut off 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 means little for Russians dealing with double-digit inflation and the worst economic contraction in years.
Russia has pushed back against the default designation, saying it has the funds to cover any bills and has been forced into non-payment. As it tried to turn its way, it announced last week that it would switch to servicing its $40 billion outstanding sovereign debt in rubles, criticizing an “unforeseen” situation that it said artificially was built by the West.
“It’s a very rare thing where a government that would otherwise have the means is forced into default by an outside government,” said Hasan Malik, senior sovereign analyst at Loomis Salles & Co. LP. “This is going to be one of the big watershed defaults in history.”
A formal announcement usually comes from rating firms, but European sanctions prompted them to withdraw ratings on Russian entities. According to documents for notes whose grace period expired on Sunday, holders can call themselves if owners of 25% of the outstanding bonds agree that an “event of default” has occurred.
With the deadline passed, investors are focused on what to do next.
They are not required to act immediately, and may choose to monitor the progress of the war in the hope that sanctions will eventually ease. Time may be on their side: According to bond documents, claims become void only after three years from the date of payment.
“Most bondholders will take a wait-and-see approach,” said Takahide Kiuchi, an economist at the Nomura Research Institute in Tokyo.
During Russia’s financial crisis of 1998 and the collapse of the ruble, President Boris Yeltsin’s government defaulted on $40 billion of its local debt.
The last time Russia fell into default compared to its foreign creditors was more than a century ago when the Bolsheviks under Vladimir Lenin rejected the country’s staggering Tsarist-era debt load in 1918.
According to Loomis Salles Malik, who is also the author of ‘Bankers and the Bolsheviks: International Finance and the Russian Revolution’, by some measures it came close to a trillion dollars in today’s money.
By comparison, foreigners had the equivalent of Russia’s Eurobonds worth about $20 billion as of early April.
“Is it fair to say: ‘Oh well, sanctions kept me from paying, so it’s not my fault’?” Malik said.
“The broader issue is that the sanctions were a reaction to an action on the part of the sovereign entity itself,” he said, referring to the invasion of Ukraine. “And I think history will judge it in the light of the latter.”
Finance Minister Anton Siluanov on Thursday dismissed the situation as a “spectacle”.
Despite the peace conflict in eastern Ukraine, billions of dollars are still pouring into the state coffers from energy exports, he reiterated that the country has the means and the will to pay.
“Anyone can declare whatever he likes,” said Siluanov. “But anyone who understands what is happening knows that this is by no means the default.”
His comments were prompted by a grace period that ended on Sunday. The 30-day window began when investors failed to receive coupon payments on May 27 due to dollar- and euro-denominated bonds.
Cash stuck after the US Treasury ended sanctions loopholes, removing an exemption that allowed US bondholders to receive payments from the Russian sovereign. A week later, Russia’s payment agent, the National Settlement Depository, was also approved by the European Union.
In reply, Vladimir Putin New regulations were introduced that mandate that Russia’s obligations on foreign currency bonds are met once the appropriate amount in rubles is transferred to a local payment agent.
The finance ministry made its latest interest payments under those rules on Thursday and Friday, the equivalent of about $400 million. However, none of the underlying bonds have terms that allow settlement in the local currency.
As of now, it is not clear whether investors will use the new instrument and whether the current restrictions will also allow them to return the funds.
According to Siluanov, there is no point for creditors to declare default through the courts because Russia has not waived its sovereign immunity, and no foreign court would have jurisdiction.
“If we eventually get to the point where diplomatic property is claimed, it is tantamount to breaking off diplomatic ties and entering a direct conflict,” he said. “And it would put us in a different world with completely different rules. We would have to respond differently to this matter – not by legal means.”