Russia has defaulted on its sovereign foreign currency debt for the first time in more than a century. This is one of the visible consequences of the sanctions that the West has massively imposed on Russia after the start of the war against Ukraine. Moscow has been unable to pay the interest on two coupons in dollars despite having enough foreign exchange reserves to do so. Investors corroborate this version and assure that they have not received the payment after the grace month.
For months, the country has managed to find ways and shortcuts that tried to isolate the government of Vladimir Putin and make the country fall into technical default. But in the end, the West has achieved its goal, albeit somewhat later than expected.
Although Russia had the capacity to meet this payment, leading economic indicators (the composite PMI sank in March and remain below 50, indicating that the economy is contracting) reveal that the country is facing one of the major economic crises of recent decades. With double-digit inflation and the flight of several leading companies, Russia will have to face a deep recession and,
This Sunday the grace period (one month) expired on about $100 million of trapped interest payments due May 27, a deadline that is considered an event of default if not paid in the correct currency, according to report from Bloomberg. IMF data reveals that the Russian government had a debt of around 40,000 million dollars denominated in hard currency (dollars, euros…) at the end of 2021, a relatively small amount. Although the total foreign debt (companies, families and government) exceeds 470,000 million, only part of that amount is in foreign currency and a lower part is still a liability of the Russian Government (those 40,000 million).
This is a clear symptom of the rapid transformation that the country has to face, both financially and economically. Russia will have to go on without the foreign capital flows that have historically helped finance investments in emerging countries.
The nation’s Eurobonds have been trading on the secondary market, while the central bank’s foreign exchange reserves remain frozen and the biggest banks are cut off from the global financial system, leaving Russia in a kind of isolation like no other. in the world given the size of Russia and its economy.
The last default on foreign debt
Russia had not defaulted on its international debts since the Bolshevik Revolution, more than a century ago, when the Russian Empire collapsed and the Soviet Union was created. Since then, Moscow has complied with international creditors. However, the country suffered a debt crisis that broke out in 1998 in which it defaulted on part of its ruble-denominated liabilities, so it is not considered a default in foreign currency.
International investors expected and knew that Russia was going to default since the sanctions that prevented Russian banks and the government from operating in international financial networks were announced, it was a matter of time. Insurance contracts covering Russian debt have assessed a probability of default at more than 80% for weeks, and rating agencies such as Standard & Poor’s and Moody’s, although they have officially stopped evaluating it, had placed the country’s debt in garbage territory.
a forced default
Russia has criticized that this is a default forced by the West, since Moscow’s intention was to continue serving its foreign debt in a religious way. While Moscow was trying to find a way to make the payments without defaulting, the authorities acknowledged last week that they would have to make the payments on this debt in rubles instead of in dollars and other hard currencies (paying in another currency means entering into default). Moscow has announced this morning that the coupons have been sent in rubles due to the impossibility of doing so in dollars.
The Ministry of Finance has informed in its Telegram account that it has entered 12,510 million rubles, equivalent to 234.9 million dollars, to the national depository that acts as a payment agent for the Eurobonds. Despite everything, this is considered a non-payment since it is considered as a monetary redenomination with respect to the original promise, which was the payment of the coupon in dollars.
From the Russian Government they have alleged a situation of “force majeure” that, according to the authorities themselves, has been artificially created by the West through the lifting of financial obstacles to prevent payment in dollars from an economy that does have sufficient foreign exchange reserves. to do it.
“It’s a very, very rare thing for one or more foreign governments to force another government that has the means to default on debt,” said Hassan Malik, senior sovereign analyst at Loomis Sayles & Company. “It’s going to be one of the great defaults in history.”
In a normal situation, the formal declaration of default would have to come from the rating agencies (S&P, Fitch…), but European sanctions have led these agencies to withdraw the ratings of Russian entities. However, according to the documents of the notes of these agencies, to which Bloombeg has had access, the grace period expired on Sunday. So investors can self-name this event as Russia’s default on foreign debt.
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