For the first time in a century, Russia defaulted on its foreign-currency sovereign debt, the culmination of ever-tougher Western sanctions that blocked payment lines to international creditors. For months, the nation evaded the sanctions imposed following the Kremlin’s invasion of Ukraine. The grace period on nearly $100 million in snared interest payments due May 27 expired at the end of the day on Sunday, a date deemed an event of default if missed.
It’s a depressing milestone in the country’s swift descent into an economic, financial, and political outsider. Since the beginning of March, the country’s eurobonds have traded at distressed prices, the central bank’s foreign reserves have remained frozen, and the largest banks have been cut off from the global financial system. Given the economic and financial damage already done, the default is mostly symbolic for the time being, and means little to Russians living with double-digit inflation and the worst economic recession in years.
Russia has resisted the default classification, claiming that it has sufficient finances to meet all payments and has been forced to default. As a last-ditch effort, it stated last week that it would begin servicing its $40 billion in outstanding sovereign debt in rubles, blaming the West for creating a ‘force majeure’ scenario.
‘It’s a very, very unusual occurrence when a government that otherwise has the wherewithal is driven into default by an external authority,’ Hassan Malik, senior sovereign analyst at Loomis Sayles & Company LP, said. ‘ It’ll be one of the most significant defaults in history. Normally, rating organizations would issue a formal announcement, but European sanctions caused them to drop ratings on Russian enterprises. Holders of the notes whose grace period ended on Sunday can call one themselves if 25 percent of the outstanding bonds agree that a ‘Event of Default’ has happened’, according to the document.
Now that the last deadline has passed, the attention moves to what investors should do next. They are not required to act immediately and may choose to observe the development of the conflict in the hope that sanctions would be eased in the future. According to the bond agreements, the claims become worthless three years after the payment date, therefore time may be on their side.
‘Most bondholders will continue to wait and watch,’ says Takahide Kiuchi, an economist at Nomura Research Institute in Tokyo. During Russia’s 1998 financial crisis and currency collapse, President Boris Yeltsin’s administration defaulted on $40 billion in local debt. The last time Russia defaulted on its international creditors was more than a century ago, when the Bolsheviks led by Vladimir Lenin rejected the country’s massive Czarist-era debt burden in 1918.
According to Loomis Sayles’ Malik, who is also the author of ‘Bankers and Bolsheviks: International Finance and the Russian Revolution,’ it reached a trillion dollars in today’s money by some measurements. As of the beginning of April, foreigners owned about $20 billion in Russian eurobonds. ‘ The wider problem is that the sanctions were itself a response to an action on the part of the sovereign state,’ he added, alluding to the invasion of Ukraine. ‘And I believe history will judge this in the latter light.’
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