Russia faced a crucial bond payment on Wednesday that could lead to the sanctions-racked country defaulting for the first time since 1998, and its first major international debt default since the Bolshevik revolution a century ago.
Moscow was due to make $117m (£89.4m) interest payments, or coupons, to investors holding two bonds denominated in dollars. But with much of its foreign exchange reserves frozen by international sanctions, it may be unable to pay.
That could pave the way to a historic default, after a 30-day grace period, that would add to the intense pressure on the Russian economy.
“The onset of war, western sanctions, the exodus of international conglomerates and freefalling investor confidence have led to Russia’s downfall with its currency, financial system, and the wider economy in a state of ruin,” said Victoria Scholar, head of investment at Interactive investor. “Although Russia technically has a 30-day grace period before an official default, a full-blown collapse is almost inevitable.”
The Russian finance minister, Anton Siluanov, has previously accused the west of trying to engineer an “artificial default” by freezing access to the Bank of Russia’s foreign exchange reserves held by other major central banks.
Moscow has said it could pay international bondholders in roubles, if it were unable to service its debts in the currencies they were issued in. It argued that this would mean it was meeting the payment.
Is that a default? From Russia’s point of view, we are fulfilling our obligations,” Siluanov said on state TV on Monday.
Russia’s finance ministry announced earlier this week it had sent a payment order of $117.2m, but that western sanctions could be a complication, in which case it would pay in roubles.
The rating agency Fitch said on Tuesday that Russia would be in default if it did not meet Wednesday’s interest payments in dollars, once the 30-day grace period had expired. “The payment in local currency of Russia’s US dollar eurobond coupons due on 16 March would, if it were to occur, constitute a sovereign default on expiration of the 30-day grace period,” Fitch said.
Moscow last defaulted during the financial crisis of 1998, when it could not meet its domestic rouble debts and Soviet-era debts. However, it continued to make payments on international bonds issued after the collapse of the Soviet Union.
Until now, its only comprehensive default on foreign debt was after the 1917 revolution, when the new Soviet government repudiated the debts of the Tsarist regime.
Russia currently owes about $40bn in euro- and dollar-denominated sovereign debt, with $20bn held abroad.
Foreign banks have about $120bn in exposure to Russia, mainly in Europe, according to data from the Bank of International Settlements.
Kristalina Georgieva, managing director of the IMF, has said a Russian default would not trigger a global financial crisis, as the total exposure of banks to Russia was “definitely not systemically relevant”.
City experts agree the potential hit to global financial markets could be limited. “While a default would be symbolic, it seems unlikely that it will have significant ramifications, both in Russia and elsewhere,” said William Jackson, chief emerging markets economist at Capital Economics.
The value of Russia government bonds has plunged to distressed levels since the invasion of Ukraine, as investors have anticipated a default.
Russian sovereign debt sold since the 2014 annexation of Crimea contains a provision for alternative currency payments if Moscow is unable to use foreign currency for “reasons beyond its control”. Those issued since 2018 included clauses allowing for rouble payments.
However, the bonds in question on Wednesday are not thought to include such small print.
A default could trigger Russian debt default insurance policies known as credit default swaps (CDS), taken out as protection against such an eventuality.
Wednesday’s coupons are the first of several interest payment hurdles facing Russia, with another $615m due later in March.