Russia Defaults On Debt As Sanctions Make Payment Impossible

Russia has defaulted on its foreign-currency sovereign debt after bond holders reported the Kremlin missed two payments on Sunday (26 June).

This is the foreseeable outcome of sanctions imposed on Russia due to the invasion of Ukraine. This is Russia's first foreign debt default since 1918. Although the country has the money to make a $100m payment which was due on Sunday, sanctions imposed by the West have made it impossible to transfer the sum to international creditors.

Russia's attempts to circumvent sanctions received a further blow in late May, when the US Treasury Department allowed a key exemption to expire.

According to reports, this waiver had previously allowed Russia’s central bank to process payments to bondholders in dollars through US and international banks, on a case-by-case basis.

Russian Finance Minister Anton Siluanov told Russia's state-owned news agency RIA Novosti that the blockage of payments does not constitute a genuine default, which usually come as the result of unwillingness or inability to pay. He called the situation a “farce”.

In general, bond defaults happen when the issuer doesn't want to make the payment. In this case, however, Russia was clearly willing to do so; it just wasn't able to, due to the sanctions.

Russia hasn't defaulted on foreign debt since the Russian revolution. Although, it did default on domestic debt back in 1998.

Russia has so far succeeded in implementing capital controls that have supported the ruble currency. Russia has also received significant revenues from energy exports as a result of soaring oil and gas prices.

This default is important as it might impact Russia’s ratings, financing costs and market access for years to come.

According to a report from Axios, a decree was signed last week by Vladimir Putin for "a temporary measure giving the government 10 days to pick banks to handle payments under a new scheme, indicating Russia will regard its debt obligations fulfilled by paying bondholders in rubles".