Western sanctions have now started hitting Russia its Eurobonds have traded at distressed levels since the start of March 2022 and Central Bank’s foreign reserves remain frozen
Russia has defaulted on its foreign-currency sovereign debt for the first time since 1998, after Western sanctions prevented Russia from transferring funds to the Taiwanese creditors.
On Sunday, i.e., June 26, 2022, the grace period on about U.S. $ 100 million of snared interest payments due May 27, 2022, expired. Earlier in 1998, during Russia’s financial crisis and Ruble collapse, the Former President of Russia – Boris Yeltsin’s Government defaulted on U.S. $ 40 billion of its local debt.
The sanctions have now started hitting Russia. The nation’s Eurobonds have traded at distressed levels since the start of March 2022, the Central Bank’s foreign reserves remain frozen and the biggest banks are severed from the global financial system.
Russia has pushed back against the default designation, saying it has the funds to cover any bills and has been forced into non-payment. Russia says the money was sent to Euroclear, a bank which would then distribute the payment to investors. But that payment got stuck there. Euroclear said it adhered to sanctions on Russia for invading Ukraine.
According to the documents, holders can call one themselves if owners of 25% of the outstanding bonds agree that an “Event of Default” has occurred. They don’t need to act immediately and may choose to monitor the progress of the war in the hope that sanctions are eventually softened.
Last time Russia defaulted vis-a-vis its foreign creditors was in 1918 when the Bolsheviks under Vladimir Lenin repudiated the nation’s staggering Czarist-era debt load.
The Kremlin Spokesperson – Dmitry Peskov said Russia had made the payments and the fact that it was blocked by Euroclear because of sanctions is “not our problem”. The Finance Minister of Russia – Anton Siluanov dismissed the situation and called it a “farce” and it is not expected to have a short-term impact. This is because Russia does not need to raise money internationally as it is reaping revenue from high-priced commodities such as oil.
Speaking on the occasion, he said, “Anyone can declare whatever they like. But anyone who understands what’s going on knows that this is in no way a default.”
Investors said they have not heard from Russia of any upcoming interest payments. They said Russia also didn’t indicate any attempt to seek a new payment route at the last minute after previous efforts to get dollars to investors failed. About U.S. $ 40 billion of Russia’s debts are denominated in dollars or euros, with around half held outside the country.
Some parts of that debt will now become automatically due because there are early repayment clauses in all debt instruments which say if the country defaults on one payment, it usually triggers the immediate demand for payment on the other debts. This means Russia could certainly face immediate debt repayment of about U.S. $ 20 billion.
