Russia defaults on foreign debt for the first time since 1918

Source: Insider

Russia has defaulted on its foreign debt for the first time in more than a century as the country can't pay creditors due to sanctions over the war in Ukraine, according to media reports.

The country missed a deadline to pay $100 million in dollar- and euro-denominated interest on two foreign-currency bonds on Sunday, The Wall Street Journal reported, citing bondholders. Some Taiwanese holders of Russian bonds also did not receive interest due by the deadline, Reuters reported citing two sources.

Russia said it had transferred the bond payment in rubles to the country's National Settlement Depository, Reuters reported last week. But the bonds' covenants do not allow for payments in rubles, which means the payments would still constitute a default. It's also unclear how bondholders can access the ruble payments as Russia's National Settlement Depository has been sanctioned by the EU.

In May, the US Treasury, too, ended a key sanctions exemption that allowed Russian sovereign bond payments to pass through to US investors. In response, Russia said it would start using rubles to pay down dollar bond payments.

This marks Russia's first default on its foreign debt since 1918, when, during the Bolshevik Revolution, communist leader Vladimir Lenin repudiated the debt of the Tsarist era.

But Russia isn't defaulting this time around because it doesn't have the money to pay; its finances are holding up well currently, thanks to soaring energy prices. Instead, the default comes as sweeping US and European Union sanctions are blocking its bond interest payments from moving through the international payments system.

Up until Sunday, Russia had been making good on its bond payments even amid sweeping sanctions. But markets have been expecting the country to eventually default on its foreign bonds as international trade restrictions intensify.

To counter the situation, President Vladimir Putin signed a decree on Wednesday to handle payments on foreign bonds under a new program — which signals that Moscow considers the interest paid, even when payments are made in rubles, Reuters reported. Russia has about $40 billion in outstanding foreign currency payments.

Russia says it's not a default

Formal default declarations are typically issued by credit rating agencies, but the big three agencies — S&P, Moody's and Fitch — have all withdrawn ratings on Russian entities due to sanctions.

Russia has hit back against what it called a "force-majeure situation," with finance minister Anton Siluanov calling the situation a "farce," Bloomberg reported last Thursday.

"Anyone can declare whatever they like," Siluanov said in an emailed statement to Bloomberg last week. "But anyone who understands what's going on knows that this is in no way a default."

Russia may still have until the end of the day on Monday to pay up, as there's no exact deadline specified in the bonds' prospectus, lawyers told Reuters.

And while Russia may still be able to get the money through the financial institution to bondholders, "the overwhelming probability is they won't be able to because no bank is going to move the money," Jay S. Auslander, a top sovereign debt lawyer at Wilk Auslander, told the Associated Press.

The impact of Russia's debt default on the world's financial systems would be limited, as the country doesn't have extensive financial links globally, Insider's Harry Robertson reported in March.

Russia's foreign debts are pretty low compared to the size of its economy, so a default is unlikely to severely affect the country now. However, a default would impact Russia's credit trustworthiness, making it harder for the country to borrow on the international markets in the future.