Russia set for first debt default since 1998 as payment deadline passes
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Russia is on course to default on its debt for the first time since 1998 with the passing of a deadline to make overdue interest payments, after western sanctions blocked Moscow from getting the cash to creditors.
About $100mn worth of interest on Russian government bonds came due on Sunday evening with no sign of payment, marking the end of a 30-day grace period during which the country sought to avoid a full default.
Russia is flush with foreign currency thanks to its huge oil and gas revenues, and has repeatedly said it wants to carry on servicing its debt. Dmitry Peskov, president Vladimir Putin’s spokesman, told reporters on Monday suggestions Russia had defaulted were “absolutely unjustified”, according to Interfax.
But escalating sanctions following its invasion of Ukraine have frozen the country out of the global financial system, and the US treasury department last month closed a sanctions loophole that allowed American investors to temporarily receive interest payments from Russia, setting the clock ticking on the grace period.
Under the terms of the bonds, if holders do not receive payment by the end of the grace period then Russia is in default, the first time Moscow has formally reneged on its debts since the Russian financial crisis in 1998.
“This is clearly not a normal default,” said Brett Diment, head of global emerging market debt at Abrdn. “You have a country that has plenty of dollars and a willingness to go on paying, but they’ve been stopped by a third party.”
Investors said there was no sign of the interest payments arriving, nor had Russia indicated any attempt to seek a new payment route at the last minute after previous efforts to get dollars to investors failed. Instead, Putin last week signed a decree setting out a new mechanism to make upcoming debt payments in roubles, a step tantamount to default under the terms of most of Russia’s foreign debt.
Peskov said on Monday that “it’s not our problem” that sanctions had stopped intermediaries from transferring the payments.
Given that markets have for months viewed default as an inevitability, the immediate implications of Sunday’s deadline are largely symbolic. Russian bonds have for months traded at levels implying that default is a formality, after dramatically plunging in price after western leaders responded to the invasion of Ukraine with unprecedented financial sanctions, including the freezing of a large slice of Moscow’s foreign currency reserves.
Markets showed little reaction to the potential default on Monday, with a bond maturing in 2026 — one of those subject to a missed interest payment — trading at about 19 cents on the dollar.
Foreign investors owned around half of Moscow’s roughly $40bn of foreign bonds — a relatively modest debt pile for an economy of Russia’s size — ahead of the invasion, and have already booked steep losses on these holdings.
“It’s pretty much in the price now,” said Paul McNamara, an emerging markets bond fund manager at GAM, of a potential default.
A default could make it more difficult for Russia to return to bond markets in future and raise its borrowing costs once it does. However, sales of fresh Russian foreign-currency debt were already a remote prospect due to the severity of western sanctions and the country’s pariah status with war still raging in Ukraine.
“I think it’s an interesting demonstration of what the Americans can do if they choose to, but I don’t think it has huge economic implications for Russia,” said McNamara.
The Russian currency has risen in the wake of the invasion, and on Monday was up about 40 per cent against the dollar for the year to date. However, investors say the increase reflects at least in part the effectiveness of sanctions in cutting off Russia’s access to imports*.
The passing of the bond deadline comes as western nations are seeking to ramp up the pressure on Moscow. G7 leaders meeting in Europe on Sunday sought a deal to impose a “price cap” on Russian oil as part of efforts to curb Moscow’s ability to fund the war in Ukraine. Ukraine’s president Volodymyr Zelenskyy addressed the summit via video link on Monday.
Western holders of Russian debt now need to decide what to do next.
Investors are able to “accelerate” repayment, demanding they get their money back immediately if 25 per cent of the holders of the defaulted bonds vote to do so. That would in turn trigger clauses that allow the acceleration of the rest of Russia’s foreign debt.
However, some holders may prefer to wait given that sanctions are also likely to complicate any attempts to pursue their claims against Russia with legal action.
“I’m not sure what bondholders gain by accelerating and attempting to litigate,” said one hedge fund manager who holds Russia debt, adding that any Russian overseas assets that investors might try to pursue in court are frozen by sanctions and therefore out of reach. “It may make more sense just to wait.”
Additional reporting by Max Seddon
*This story has been amended to correct the year to date change in the rouble against the dollar
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