Russia said on Monday two of its debt payments were prevented from reaching creditors, bringing the country closer to its first foreign default in a century amid sanctions over the Ukraine offensive.
The announcement came on the 124th day of Russia’s military intervention in Ukraine, although Western sanctions have so far failed to force the Kremlin to change course.
Western economic sanctions have largely decoupled the country from the international financial system, making it difficult for Moscow to service its debt.
The Russian authorities insist they have the means to pay off the country’s debt and accuse the West of trying to artificially bankrupt Moscow.
“There is no reason to call this situation a default,” Kremlin spokesman Dmitry Peskov told reporters after a key payment deadline expired on Sunday.
“These default claims are absolutely false,” he said, adding that Russia paid off the debt in May.
A 30-day grace period for paying $100 million in interest payments expired Sunday night, most of which had to be paid in foreign currency.
In a statement, Russia’s Treasury Ministry said two of its debt payments had not been remitted to creditors but denied the event amounted to a default.
International accounting and clearing systems “received the funds entirely in advance,” but payments were not transferred to final recipients due to “the actions of third parties,” the ministry said.
“The investors’ non-receipt of the money is not due to non-payment but to third-party actions,” the ministry added, saying such an event does not constitute a default in payment.
“The actions of foreign financial intermediaries are beyond the control of the Russian Ministry of Finance,” the statement said.
Finance Minister Anton Siluanov has previously dismissed the situation as a “farce”.
– “Vicious circle of decline” –
While some experts dismiss the event as a technical failure, others say it will have far-reaching consequences.
“This default is important as it will impact Russia’s ratings, market access and funding costs for years to come,” said Timothy Ash, emerging markets strategist at BlueBay Asset Management.
“And that means lower investment, lower growth, lower living standards, capital and people flight (brain drain) and a vicious cycle of decline for the Russian economy.”
Russia lost its last chance to service its foreign currency loans after the United States last month lifted a waiver that allowed US investors to receive Moscow’s payments.
In response, Russia said it would pay in rubles, which could be converted into foreign currency, using a Russian financial institution as a paying agent, although the bonds do not allow payments in local currency.
Russia has accused the West of trying to force it into an “artificial default” through unprecedented sanctions after President Vladimir Putin dispatched troops to Ukraine on February 24.
Measures included a $300 billion freeze on the Russian government’s foreign exchange reserves held abroad, making it difficult for Moscow to service its foreign debt.
The country last defaulted on its foreign debt in 1918, when the Bolshevik revolutionary leader Vladimir Lenin refused to recognize the massive debts of the toppled tsarist regime.
Russia defaulted on its domestic debt in 1998 when falling commodity prices hit a financial squeeze that prevented it from supporting the ruble and paying off debts accumulated during the first war in Chechnya.
The second most senior International Monetary Fund official, Gita Gopinath, said in March that a Russian default would have a “limited” impact on the global financial system.
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