Russia¡¯s First Foreign Debt Default In A Century Looks All But Inevitable Now

After another brutal week for the country's finances amidst rising sanctions, Russia¡¯s first external default in a century now looks inevitable.

First, the Treasury halted dollar debt payments from Russia¡¯s accounts in U.S. banks, ramping up its restrictions on the country. And then, when an attempted hard-currency payment was blocked, Russia breached the terms on two bonds by paying investors rubles instead of dollars, as per BloombergQuint report.

Last week, UK govt had frozen the assets of Sberbank, which is Russia¡¯s largest bank.

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That is what seemed to have pushed the countdown clock a step closer to a possible default. The clock has been ticking ever since Russia invaded Ukraine in February 2022, and the U.S. and other nations across the globe swiped back with a clampdown on banks, companies, oligarchs etc.

Moreover, a freeze on the central bank¡¯s foreign reserves unplugged Russia from the global financial system, making it the world¡¯s most-sanctioned nation in a matter of days.

With Vladimir Putin¡¯s government hampered by asset blocks amidst various forms of sanctions, speculation has mounted that Russia may not be able to avoid default for long. The country¡¯s bonds are already trading deep in distressed territory. There seems to be almost a 90% chance that a default will happen this year, according to the latest figures from ICE Data Services.

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Last Default

Russia last defaulted on a domestic debt in 1998, but the last foreign/external debt default was in the aftermath of the 1917 revolution.

Last week, S&P had said that it had declared Russia in a selective default after it used rubles to make a payment on a dollar-denominated bond on April 4th 2022.

The Road Ahead

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As the dollar bonds that were serviced in rubles recently have 30-day grace periods, Russian Finance Minister Anton Siluanov has that much time to find a workaround or push his argument that this isn¡¯t a default because a payment was ¡®technically¡¯ made.

This week, the finance minister had said the rubles transferred in lieu of dollars can be converted for creditors just as soon as the reserves freeze is eased.

He reportedly said ¡°Western countries are trying in every possible way to make Russia declare default,¡± adding that Russia will use ¡°other mechanisms¡± to make payments.

In the meantime, it remains to be seen what the official judgment turns out about whether a default event has occurred or not by Russia.

Ever since the Russian invasion on Ukraine took place, Russian debtors have struggled to get funds to creditors on time. And this week, Sovcombank PJSC became the first bank in Russia to say it will miss a payment on foreign-currency bonds.

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