Russia on Monday acknowledged that two interest payments on its debt failed to reach creditors, an event that could be viewed as a default, even if Moscow disputes such an interpretation.
Why the default risk?
Russia was due to pay $100 million in interest on its debt on May 27, and the one-month grace period for payments expired Sunday.
The Russian Treasury said it paid out the money on May 20. However, on Monday it conceded that the money did not reach creditors as bank intermediaries blocked the remittances due to Western sanctions against Moscow over the war in Ukraine.
The United States has prevented Moscow from paying its dollar debt since late May.
How to know if Russia is really in default?
Traditionally, it is the major rating agencies (Fitch, Moody’s, S&P Global Ratings) that make such a determination.
However, with Western sanctions in place, “they are now barred from grading Russian government bonds,” said Eric Dor, director of economic studies at IESEG Business School.
“We could well have defaulted on payments without an official explanation from an authorized institution,” he added.
It will now likely be up to the Credit Derivatives Determinations Committee (CDDC), a committee of creditors, to make the official determination as to whether Russia has missed payments and whether this constitutes a default.
The committee earlier this month acknowledged that Russia failed to pay $1.9 million in penalty interest on another payment due.
She plans to meet Wednesday afternoon to discuss the May 27 missed payment.
It is also the committee that decides whether or not to trigger payment on credit default swaps (CDS), financial products designed to insure creditors against default.
Moscow argues that the fact that creditors did not receive their money was not due to failure to make payment, but to actions of third parties, so there is no default on its part.
What are the consequences of a payment default?
Russia’s last default on its foreign debts was in 1918, when Bolshevik leader Vladimir Lenin repudiated tsarist-era debts.
In the event that a default is declared, “Russia will not be able to borrow in foreign currencies,” said Slim Souissi, a researcher at the University of Caen’s Department of Business Administration.
“In the short term, there will be problems raising funds in the international markets,” and that could take years, said Souissi, who was previously a financial analyst at Fitch.
Liam Peach, Emerging Europe Economist at Capital Economics, downplayed the impact of a default finding as Western sanctions are already blocking Russia’s access to international capital markets.
Normally, a failure can have serious consequences.
Argentina’s decision to freeze $100 billion in debt payments in 2001 triggered a deep economic, political and social crisis.
With Russia’s sanctions again blocking access to many markets, Peach said a default is a “largely symbolic event” that is unlikely to have any additional macroeconomic impact.
In terms of sums, too, the situation in Russia is different.
“About $2 billion in payments are due by the end of the year and that will not destabilize the international financial system,” Dor said.
Mexico’s default in 1982 triggered debt crises in several developing countries as creditors demanded higher interest rates.
Peach said only about half of Russia’s foreign currency bonds are held by foreigners, reducing the possibility of a broader impact.
According to legal experts interviewed by AFP, collecting the debt could prove tricky. The terms of Russian bonds are notoriously vague, including on basic elements such as jurisdiction to resolve disputes.
How did Russia try to avoid a default?
In order to circumvent the ban on payments in dollars, Moscow made the corresponding sum in rubles available to creditors at the National Settlement Depository (NSD), a Russian financial institution.
According to Souissi, this would constitute a default if the terms of the bond did not specify payment in rubles.
Moscow said the agreement allows Western creditors to get their money back and they are free to request conversion into the foreign currency of their choice.
But getting the money out of Russia isn’t easy, and “investors weren’t keen on opening accounts with the NSD,” Dor said.
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