Russia missed a deadline to make bond payments on Sunday, a move marking its first international debt default in more than a century, after Western sanctions thwarted government efforts to pay investors. foreign. The lapse adds to efforts to isolate Moscow from global capital markets for years.
Some $100 million in interest payments denominated in dollars and euros did not reach investors within a 30-day grace period after the May 27 deadline was missed. The grace period expired Sunday night.
A formal declaration of default would have to come from bondholders because ratings agencies, which normally declare when borrowers have defaulted, cannot report on Russia because of sanctions. The Committee on Credit Derivatives Determinations, a panel of investors that rules on whether default-linked securities should be paid, has not yet been asked to make a decision on these bond payments.
But it appeared that the payments had not reached the bondholders’ accounts until Sunday night, as required by the bond contracts. On Monday, Russia’s Finance Ministry said it had made the payments in May and they had been transferred to Euroclear, a Brussels-based clearinghouse, but access to bondholders was subsequently blocked.
Russia rejects the declaration of default, alleging that it has made an effort to pay. Dmitri S. Peskov, the Kremlin spokesman, told reporters on Monday that the statements about the breach were “absolutely illegal.”
“The fact that Euroclear retained this money, did not transfer it to the recipients, is not our problem,” Peskov said. “In other words, there is no reason to call this situation a breach.”
The Finance Ministry added that the actions of foreign financial institutions were out of its control and that “it seems advisable for investors to communicate directly with the relevant financial institutions” about payments.
Euroclear declined to comment.
“We can expect Russia to adhere to its alternative narrative: Default is not default, we tried and it’s not our fault,” said Tim Samples, a professor of legal studies at the University of Georgia Terry College of Business and an expert. in sovereign debt, adding that Russia has also not submitted to the jurisdiction of foreign courts. Still, “that has to be a bit humiliating, even for a country that can survive and sustain a war for its hydrocarbon revenues,” he said.
The default risk arose in late February after Russia invaded Ukraine and sanctions were imposed to cut off the country from international financial markets. In late May, Russia tried to get around tougher sanctions that cut off access to US banks and bondholders by sending payments to a Moscow-based institution. But the funds ultimately didn’t find their way into the bondholders’ accounts due to far-reaching US and European sanctions.
News of Monday’s apparent breach showed “how strong” international sanctions have been against Russia, a senior US administration official told a briefing for journalists at the Group of 7 summit in Germany, highlighting the effect ” dramatic” in Russia’s economy.
This breach is unusual because it is the result of economic sanctions blocking transactions, not because the Russian government has run out of money. Moscow’s finances remain resilient after months of war, with nearly $600bn in foreign exchange and gold reserves, though about half of that is frozen abroad. And Russia continues to receive a steady influx of cash from oil and gas sales. Still, a default would be a stain on the country’s reputation that will remain in investors’ memories and will likely increase its borrowing costs if it is able to tap international capital markets.
Unlike other major defaults in recent history, such as in Greece and Argentina, this default is expected to have relatively little impact on international markets and Russia’s budget. For one, Russia has already lost access to international investors, traditionally the worst consequence of default.
“The only clear negative result of the default is that the external market will be effectively closed to the finance ministry,” said Sofya Donets, an economist at Renaissance Capital in Moscow. “But it’s already closed.”
Russia’s central bank chief Elvira Nabiullina said this month there would be no immediate fallout from a default because there had already been an outflow of investors and a drop in the value of Russia’s assets. The central bank is more concerned about inflation, most recently at around 17 percent, and supporting the economy through “large-scale structural transformation” after an exodus of foreign companies and imports.
Western sanctions alone are expected to block Russia from much of the international capital markets for a long time. Regardless, Russia has been reluctant to give up its hard-earned reputation as a reliable borrower after its economic collapse in 1998, when the government defaulted on ruble-denominated bonds amid a currency crisis.
Last month, Russia insisted that it had met its debt obligations by sending funds to its paying agent in Moscow, the National Payments Depository. The deposit has since fallen under European sanctions, further restricting Russia’s ability to pay bondholders. Finance Minister Anton Siluanov accused the West of artificially fabricating a default and threatened legal action against US authorities.
This is the first major default on Russia’s foreign debt since 1918, shortly after the Bolshevik revolution.
On Wednesday, President Vladimir V. Putin signed a decree saying that future payments to holders of debt denominated in dollars or euros would be made through Russian financial institutions and that the obligations would be considered fulfilled if they were paid in rubles and converted. Most bond contracts do not allow payment in rubles.
Over the next two days, nearly $400 million in dollar-denominated debt payments were due on bonds that had grace periods of 30 and 15 days. The Finance Ministry said it had sent the payments, in rubles, using the new procedure established by the presidential decree. But it is unclear how foreign investors will gain access to the funds.
Foreign investors held about half of Russia’s $40 billion in foreign-currency debt outstanding at the end of last year. As default risk increased this year, PIMCO, the investment management firm, saw the value of its Russian bond holdings decline by more than $1 billion, and pension funds and mutual funds with exposure to the Emerging market debt also fell.
But exposure to Russian assets is limited in the United States and Europe because sanctions imposed since Russia’s annexation of Crimea in 2014 have discouraged investors who did not want geopolitical risk.
By international standards, Russia does not have that much debt. Its public debt was only about 17 percent of gross domestic product last year, according to the International Monetary Fund, one of the few countries with debt ratios below 25 percent. The United States, whose assets are in demand among global investors and considered low risk, has a debt ratio of 125 percent of GDP.
Russia’s low debt levels are partly a result of “this new geopolitical era” since the annexation of Crimea, Donets said. “But it is also a product of the 1998 default,” he added, when “the Ministry of Finance was seriously burned.” Since then, the ministry has not been as active in issuing new foreign currency debt, he said.
Russia has not depended on loans from international investors for its budget. The Finance Ministry has not issued dollar-denominated debt since 2019, when US sanctions barred US banks from buying the debt directly. The last euro-denominated debt issue was in May 2021.
Instead, Russia has relied on its oil and gas exports, and those dollar revenues that went into reserves and increased the national wealth pool.
“Why would it borrow and pay additional fees when it is a country that is accumulating oil funds, accumulating foreign currency, a country that has $600 billion in reserves?” Mrs. Donets said.
The war has not changed that calculation. Russia’s current account surplus, a broad measure of trade and investment, soared as revenue from energy exports rose, capital controls stemmed investment flight and sanctions cut imports. It has helped push the ruble to its highest level in seven years.
If Russia issues more debt, it will lean on local banks and short-term residents to buy ruble-denominated bonds.
Russia “will not have access to capital markets until the war is over and sanctions are lifted,” said Richard Portes, an economics professor at the London School of Business.
The long-term consequences of a breach are unclear due to the unusual nature of the financial breach. But it is possible to imagine a future in which Russia can sell debt on international markets again, analysts say, if the war ends and Russia’s geopolitical ambitions change. Without Putin and with hundreds of billions of dollars in unfrozen international reserves, it could return to the markets.
“Access to the capital market can be restored very quickly,” Portes said. “Once Russia is back in good political shape and sanctions are lifted.”
“If he is not a political pariah, he will not be an economic pariah,” he added.
The report was contributed by Ivan Nechepurenko, Andres R. Martinez, jim tankersley Y alan rappeport.