Russia appeared to be falling into default on its international debt on Monday as a grace period to make a payment expired, the latest sign of how isolated Russia has become from global financial markets as punishment for its invasion of Ukraine.
The extra period to pay about $100 million in euros and dollars ended on Sunday, 30 days after an initial May 27 deadline, as sanctions prevented Russia’s payment routes.
The declaration of a default event will need to come from investors because ratings agencies, barred by sanctions from reporting on Russia, have not declared Russia in default. Nor has the Credit Derivatives Determinations Committee, a panel of investors who rule on whether to pay out securities linked to defaults. But it appeared that the payments had not reached bondholders’ accounts as of Sunday night.
Russia’s finance ministry said before the deadline that Russia had fulfilled its obligation to investors and paid in rubles, though most of Russia’s foreign-currency debt doesn’t allow for payments in rubles. Bloomberg and Reuters reported on Monday that Russia had defaulted because the payment deadline was missed, but Tass, Russia’s state-news agency, reported later Monday that the government did not consider itself to be in default.
The risk of default emerged in late February after Russia invaded Ukraine and sanctions were imposed to sever the country from international financial markets. In late May, Russia tried to navigate tightening sanctions that cut off its access to American banks and bondholders by sending the payments to a Moscow-based institution. Ultimately, the funds never made it into bondholders’ accounts.
Moscow is likely to continue to insist that it has not defaulted, given its efforts to pay. The contentious nature of the default will make it difficult for investors to demand early payment on outstanding debt, which often happens after a default, while sanctions could make it almost impossible to resolve the disagreement.
This default would be unusual because it would be a result of economic sanctions blocking transactions, not because the Russian government has run out of money. Moscow’s finances remain strong after months of war, with nearly $600 billion in foreign currency and gold reserves, though about half of that is frozen overseas. And Russia continues to receive a steady influx of cash from sales of oil and gas. Still, a default would be a stain on the country’s reputation that will probably make it more expensive to borrow money on international markets if it gains access again.
Unlike other major defaults in recent history, this one is not likely to have a significant effect on international markets or local residents.
The head of Russia’s central bank, Elvira Nabiullina, said that there would be no immediate consequences of a default because there had already been an outflow of international investors and a drop in the value of Russia’s assets. Additionally, the government can still pay Russians who own ruble-denominated bonds. The central bank is more concerned about inflation and supporting the economy through an exodus of foreign companies and investment.
The sanctions alone are expected to block Russia out of large parts of international capital markets for a long time. Regardless, Russia has been reluctant to give up its reputation as a reliable borrower, which was hard won after an economic crisis two decades ago, when the government defaulted on ruble-denominated bonds.