Sources claim that Russia defaulted on its foreign debt on Sunday, the first time since 1918 when the grace period for its $100million payment had ended.
Investors failed to receive coupon payments on euro- and dollar-denominated notes due to them, so a 30-day grace period was set up. This delayed the Kremlin’s obligation to make the $100m interest payment until May 27.
Russia claimed that it had transferred the funds to Euroclear Bank SA. This would then distribute to investors. Bloomberg claims that these funds became stranded in Russia due to tighter Western sanctions against Moscow. Creditors were not allowed to receive them.
Euroclear informed the BBC that they abide by all sanctions. Russia was last in default on its foreign debts in 1918 during the Bolshevik Revolution. The Bolshevik Revolution saw Vladimir Lenin refuse to pay the outstanding Russian Empire bills.
The administration of President Boris Yeltsin also failed to pay $40 billion in domestic debt payments during the 1998 financial crisis. However, international assistance helped the country recover.
Senior sovereign analyst at Loomis Yales, Hassan Malik, said that it is a rare occasion when a government with the ability to pay its bills is forced into default. It will be one of the most significant watershed failures in history. The U.S. Treasury Department’s decision to close a loophole that was set to expire May 25 effectively stopped Russia from being in a position to repay billions of dollars in foreign debt through American institutions. This made the default appear imminent.
Russia responded by declaring that it would pay off all debts in dollars in rubles and offer “the possibility of eventual conversion into the original currency.” After the loophole in sanctions was closed, the European Union sanctioned the Russian National Settlements Depository (NSD). The NSD plays an “essential role in Russia’s financial system” which “directly and indirectly assists the Russian Government in its policies, activities, and resources.”
Effectively, the NSD ban prevents Russia from transferring money outside of Russia.
Anton Siluanov (Russia’s Finance Minister) called the situation a “farce”. He said that Russia maintains it has the financial resources to pay the debt. The absence of payment should not be considered a default, as the Kremlin already made the payment.
According to the finance minister there are two reasons investors may not be able to receive the payment. The first is that foreign infrastructure operations, including correspondent banks and settlement and clearing system, are prohibited. According to Siluanov (quoted by RIA Novosti), the second is that we explicitly forbid foreign investors from receiving payments.
RIA Novosti quoted him as saying, “Everyone who is in the know knows that this isn’t at all a default.” “Everything seems absurd about this.”
According to Siluanov who stated last month that Russia was keen to repay the debt, the scenario had been “artificially created by an unfriendly nation.” Siluanov also stated that default would not affect the standard of life for Russians. Russia owes $40 billion in foreign bonds. Before the conflict with Ukraine, Russia had $640 billion of foreign currency and gold reserves.
However, the majority of it was stored abroad and then frozen after the invasion of neighboring Ukraine on Feb. 24.
