What a Russian forced debt default means and what comes next?

Moscow insists it has repaid the eurobond payments in roubles using its own settlement system - which is not recognised internationally

A food delivery courier passes a commercial premises put up for rent in Moscow. A series of punitive measures have been imposed by western countries to incapacitate Russia economically. AFP
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Russia defaulted on its foreign debt for the first time in a century, as the grace period to repay roughly $100 million of bond payments expired at midnight on Sunday, according to Bloomberg.

Moscow has brushed off the event as artificial and manufactured by western countries whose sanctions barred it from making payments internationally. It has argued that it has made the coupon payments in roubles for the country's 2027 and 2047 eurobonds that are priced in US dollars, using its own settlement system, which is not recognised internationally.

A debtor cannot unilaterally change the currency of payment which is considered a violation of the terms of the bond contracts. That is generally considered a default by ratings agencies, but due to a slew of sanctions, the agencies have withdrawn their ratings.

While no official declaration is expected, there will be an “event of default” on Monday morning if investors are not repaid, Bloomberg cited bonds documents as showing.

The last time Russia defaulted on foreign debt was in 1918 following the Bolshevik revolution when Vladimir Lenin refused to honour foreign debt obligations of the deposed tsar's regime.

In 1998, the country defaulted on domestic debt, and declared a moratorium on payment to foreign creditors amid a currency crisis that led to the devaluation of the rouble.

How has Russia reached this point?

Russia is facing payment difficulties on its $40 billion of international bonds as a result of a series of punitive measures imposed by western countries to incapacitate Moscow economically in response for its military offensive in Ukraine, which began in February.

As part of sanctions imposed by the US and the EU, Russia's biggest banks have been disconnected from the global financial system, markets and infrastructure, and its ability to conduct cross country payments through the Swift platform has also been impeded.

In March, major rating agencies including S&P Global Ratings, Fitch Ratings and Moody's Investors Service downgraded Russia's sovereign credit rating to “junk” status due to the country's debt being “highly vulnerable to non-payment”.

Russia had previously managed to avoid a default because of an exemption granted under US sanctions. But this expired on May 25.

The 30-day grace period on interest payments on bonds that were due on May 27 expired at midnight on Sunday June 26.

After plummeting as much as 100 per cent to the US dollar, Russia's rouble has recovered strongly. Reuters/ File

What is Moscow's stance?

Russia's Finance Ministry said on Thursday that it had transferred 12.51bn roubles, equivalent to $234.85m, to the National Settlement Depository (NSD), which it has set up to pay for Russian sovereign Eurobonds, in payment of coupons on the country's 2027 and 2047 Eurobonds.

The move is part of the “new arrangement for servicing sovereign external debt, as approved by a presidential decree of June 22", the Interfax news agency said.

Finance Minister Anton Siluanov said earlier that banks that are still able to work with foreign currency would be involved payments to holders of Russian bonds.

The ministry said it was switching to a new procedure for payments on Eurobonds due to the “non-fulfilment by foreign counterparties of their commitments to conduct payments for the settlement of Russian public debt”.

It also said Eurobond holders would be divided into three groups, with those with ownership rights in Russia receiving the funds immediately.

“Funds will be transferred to the second group of Eurobond holders, whose ownership is recorded by Russian depositories with the participation of foreign ones, by the NSD via such Russian depositories, bypassing foreign intermediaries,” the report said.

The leftover funds will be shifted to a special rouble Type “I” account, from which payments will be made to the third-group holders.

“Funds on this account will be indexed at the current market exchange rate of the nominal currency until actual settlements with the owners are made,” the report said.

“The central depositary does not bear costs related to the indexation of funds credited to Type “I” accounts,” it added.

After plummeting as much as 100 per cent to the US dollar, Russia's rouble has recovered strongly and is currently trading at roughly 54.11 to the dollar, its strongest in seven years.

What next?

While Russia states that it has honoured its obligations, the dollar-denominated eurobonds do not permit for payments to be made in roubles, which technically means that Moscow will be in a situation of default.

It is now up to bondholders to decide whether or not to call a default or wait for sanctions to be eased at some point, allowing payment to be made in the future.

Russia still has roughly $2bn in sovereign bond payments due by the end of this year.

For now, it plans to continue making the payments in roubles — on Friday, the NSD received 8.5bn roubles or $159.4m equivalent towards the payment of coupon interest on the country's 2028 Eurobonds, Interfax reported, citing the finance ministry.

“A declaration of default is a symbolic event,” Takahide Kiuchi, an economist at Nomura Research Institute, told Bloomberg.

“The Russian government has already lost the opportunity to issue dollar-denominated debt. Already as of now, Russia can’t borrow from most foreign countries.”

While a default might mainly be symbolic at this stage, if creditors do not receive their dues, they could opt to go down the legal route, which could create problems for Moscow.

A default will also lead to reputational damage for Russia and could have repercussions on its ability to borrow from the international market in the future.

Updated: June 27, 2022, 6:42 AM