Russia defaults on foreign debt for first time since 1918

Russia has pushed back against the default designation, saying it has the funds to cover any bills and has been forced into non-payment.

Russia defaulted on its foreign-currency sovereign debt for the first time in a century, the culmination of ever-tougher Western sanctions that shut down payment routes to overseas creditors.

For months, the country found paths around the penalties imposed after the Kremlin’s invasion of Ukraine. But at the end of the day on Sunday, the grace period on about $100m (€94.7m) of snared interest payments due May 27 expired, a deadline considered an event of default if missed.

It’s a grim marker in the country’s rapid transformation into an economic, financial and political outcast. The nation’s eurobonds have traded at distressed levels since the start of March, the central bank’s foreign reserves remain frozen, and the biggest banks are severed 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 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 twist its way out, it announced last week that it would switch to servicing its $40bn (€37.9m) of outstanding sovereign debt in rubles, criticizing a “force-majeure” situation it said was artificially manufactured by the West.

A formal declaration would usually come from ratings firms, but European sanctions led to them withdrawing ratings on Russian entities. According to the documents for the notes whose grace period expired Sunday, holders can call one themselves if owners of 25% of the outstanding bonds agree that an “Event of Default” has occurred.

The last time Russia fell into default vis-a-vis its foreign creditors was more than a century ago, when the Bolsheviks under Vladimir Lenin repudiated the nation’s staggering Czarist-era debt load in 1918.

Finance Minister Anton Siluanov dismissed the situation on Thursday as a “farce.” With billions of dollars a week still pouring into state coffers from energy exports, despite the grinding conflict in east Ukraine, he reiterated that the country has the means, and the will, to pay.

Last week, Vladimir Putin introduced new regulations that say Russia’s obligations on foreign-currency bonds are fulfilled once the appropriate amount in rubles has been transferred to the local paying agent. Picture: Mikhail Metzel, Sputnik, Kremlin Pool Photo via AP

“Anyone can declare whatever they like,” Siluanov said. “But anyone who understands what’s going on knows that this is in no way a default.” 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 cash got trapped after the US Treasury let a sanctions loophole expire, removing an exemption that had allowed US bondholders to receive payments from the Russian sovereign. 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 say Russia’s obligations on foreign-currency bonds are fulfilled once the appropriate amount in rubles has been transferred to the local paying agent.

The Finance Ministry made its latest interest payments, equivalent to about $400m (€379m), under those rules on Thursday and Friday. However, none of the underlying bonds have terms that allow for settlement in the local currency.

So far, it’s unclear if investors will use the new tool and whether existing sanctions would even allow them to repatriate the money.

• Bloomberg