Russia heads towards default as payment deadline looms

Russia could default on its foreign debt for the first time this century as the clock ticks down on a pair of overdue interest payments blocked by western sanctions.

About $100 million (€94 million) worth of interest on Russian government debt is due to bondholders by Sunday night, the end of a 30-day grace period during which the country must make the payments to avoid defaulting.

Russia said it had sent the funds to investors, but financial sanctions imposed on the country following its invasion of Ukraine have hampered Moscow’s ability to access crucial market infrastructure and pay foreign debt holders.

The looming default would be Russia’s first since 1998 and comes after the US Treasury closed a loophole in sanctions last month that allowed American investors to receive payments from Moscow. Reneging on its debt would be a blow to Russia’s prestige and could trigger legal action from some creditors.

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“Russia is heading to default because of sanctions because it invaded Ukraine and is committing war crimes ... it’s entirely in its ability to determine what happens here,” said Timothy Ash, emerging markets strategist at BlueBay Asset Management.

Russia has plenty of foreign currency because of its vast oil and gas revenues, but international sanctions have cut the country off from the global financial system and complicated its ability to pay foreign bondholders.

The payments originally due on May 27 were sent to Russia’s National Settlement Depository (NSD). It would then typically pass them to international securities depositories such as Belgium-based Euroclear or Luxembourg’s Clearstream, which settle trades for clients. However, the EU sanctioned NSD in early June, shutting off western institutions’ ability to receive payment.

Russian officials, including finance minister Anton Siluanov, have repeatedly stated that western governments were trying to force the country into an “artificial” default and have persistently sought ways to circumvent the sanctions, saying Moscow would pay in roubles if dollars cannot reach bondholders.

“They can say whatever they want but a contract’s a contract and it clearly stipulates how and when it’s honoured,” said Ash. “As a creditor, you just want your money back, the excuses are meaningless.”

Russian president Vladimir Putin signed a decree this week setting out a new mechanism to make upcoming payments in roubles, including a further $400 million due on Thursday and Friday, and then allow investors to convert them into foreign currencies. Unlike some of Russia’s debt, the terms of these bonds do not contain any provisions for making payments in roubles.

Although sanctions had already left little prospect of Moscow returning to international bond markets for the foreseeable future, a formal default could further complicate any attempt to issue debt and increase borrowing costs once the curbs were lifted, said experts.

For foreign holders of Russian debt, the damage has already largely been done through the collapse in bond prices that followed the invasion of Ukraine. Tatiana Orlova, lead emerging markets economist at Oxford Economics, said the fact that critical sanctions loopholes have been closed makes it incredibly difficult for foreign bondholders to recover their investments.

Since Russia is likely to default because of sanctions rather than a lack of cash, there is expected to be little impact on its population. But “it’s going to be viewed as a big blow to credibility”, said Orlova. — Copyright The Financial Times Limited 2022