EXPLANATION: What is the impact of a Russian debt default? | business news

Russia is about to default on its foreign debt for the first time since the 1917 Bolshevik Revolution, further alienating the country from the global financial system following sanctions imposed over its war in Ukraine.

The country faces a deadline on Sunday night to meet a 30-day grace period on interest payments originally due on May 27. But it could take time to confirm a breach.

“While there is a possibility of something magical happening” and Russia getting the money through financial institutions to bondholders despite sanctions, “no one is taking that gamble,” said Jay S. Auslander, a prominent lawyer. of sovereign debt from the firm of Wilk Auslander in New York. “Most likely they can’t do it because no bank is going to move the money.”

Last month, the US Treasury Department terminated Russia’s ability to pay its billions of debt to international investors through US banks. In response, Russia’s Finance Ministry said it would pay dollar-denominated debts in rubles and offer “the opportunity for subsequent conversion to the original currency.”

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Russia says any default is artificial because it has the money to pay its debts, but says sanctions have frozen its foreign currency reserves abroad.

“There is money and there is also the willingness to pay,” Russian Finance Minister Anton Siluanov said last month. “This situation, artificially created by a hostile country, will have no effect on the quality of life for Russians.”

Tim Ash, senior analyst for emerging market sovereigns at BlueBay Asset Management, tweeted that the default is “clearly not” out of Russia’s control and that sanctions prevent it from paying its debts because it invaded Ukraine.

Here are key things to know about a Russian default:


About $40 billion in foreign bonds, about half of that for foreigners. Before the start of the war, Russia had about $640 billion in foreign exchange and gold reserves, much of which was held abroad and is now frozen.

Russia has 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. Russia defaulted on its internal debts in the late 1990s, but was able to recover from that default with the help of international aid.

Investors have been waiting for Russia to default for months. Insurance contracts covering Russian debt have priced an 80% probability of default for weeks, and ratings agencies such as Standard & Poor’s and Moody’s have placed the country’s debt in junk territory.


Rating agencies can downgrade to default or a court can decide the issue. Bondholders holding credit default swaps (contracts that act as insurance policies against default) can ask a committee of financial firm representatives to decide whether nonpayment of debt should trigger a payment, which would still it is not a formal declaration of default.

The Credit Default Determination Committee, an industry group of banks and investment funds, ruled on June 7 that Russia had failed to pay the required additional interest after making a payment on a bond after the April 4 maturity date. . But the committee postponed further action due to uncertainty about how the sanctions could affect any deal.

The formal way to declare default is if 25% or more of bondholders say they didn’t get their money. Once that happens, the provisions say all of Russia’s other foreign bonds are also in default, and bondholders could seek a court judgment to enforce payment.

Under normal circumstances, investors and the defaulting government typically negotiate a deal in which bondholders receive new bonds that are worth less but give them at least partial compensation.

But the sanctions prevent dealings with the Russian Finance Ministry. And no one knows when the war will end or how much the defaulted bonds might end up being worth.

In this case, declaring default and suing “might not be the smartest option,” Auslander said. It is not possible to negotiate with Russia and there are so many unknowns that creditors may decide to “wait for now”.

Investors who wanted to get out of Russian debt have probably already headed for the exits, leaving those who bought bonds at cut prices hoping to benefit from a long-term deal. And they may want to keep a low profile for a while to avoid being associated with the war.

Once a country defaults, it can be suspended from borrowing in the bond market until the default is resolved and investors regain confidence in the government’s ability and willingness to pay. But Russia has already been cut off from Western capital markets, so any return to lending is a long way off anyway.

The Kremlin can still borrow rubles at home, where it relies mainly on Russian banks to buy its bonds.


Western sanctions over the war have caused foreign companies to flee Russia and severed the country’s commercial and financial ties with the rest of the world. The default would be one more symptom of that isolation and disruption.

Investment analysts cautiously estimate that a Russian default would not have the kind of impact on global financial markets and institutions that a previous default had in 1998. Back then, Russia’s default on domestic ruble bonds led to the US government to step in and get banks to bail out Long-Term Capital Management, a large US hedge fund whose collapse, it was feared, could have shaken the broader financial and banking system.

Bondholders, for example funds that invest in emerging market bonds, could suffer serious losses. Russia, however, played only a small role in emerging market bond indices, limiting losses to fund investors.

While the war itself is having devastating consequences in terms of human suffering and rising food and energy prices around the world, a government bond default “would definitely not be systemically relevant.” said the managing director of the International Monetary Fund, Kristalina Georgieva.

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