According to Bloomberg, Russia has just defaulted on its foreign debt for the first time since the Bolshevik revolution of 1917, further alienating the country from the global financial system as a result of sanctions against its war in Ukraine

The country missed a deadline on Sunday evening (local time) to meet a 30-day grace period on interest payments originally due on May 27.

Last month, the US Treasury Department cut Russia’s ability to repay its billions in debt to international investors through US banks.

Russia defaulted on its foreign debt for the first time in more than a century after missing a deadline on Sunday
Russia defaulted on its foreign debt for the first time in more than a century after missing a deadline on Sunday (AP / Mikhail Metzel)

In response, Russia’s finance ministry said it would pay dollar-denominated debt in rubles and “provide the opportunity for later conversion into the original currency”.

Russia calls any default artificial because it has the money to pay its debts, but says sanctions have frozen its foreign exchange reserves abroad.

“There is money and there is also the willingness to pay,” Russian Finance Minister Anton Siluanov said last month.

“This situation, artificially created by an unfriendly country, will not have any effect on the quality of life of Russians.”

Tim Ash, senior sovereign emerging markets analyst at BlueBay Asset Management, tweeted that the default is “clearly not” beyond Russia’s control and that sanctions are stopping the country from paying its debts because it invaded Ukraine.

Here are the most important things to know about a Russian standard:

HOW MUCH IS RUSSIA GUILTY?

About $57.6 billion in foreign bonds, about half of which are foreigners.

Before the war, Russia had approximately $922 billion in foreign exchange and gold reserves, much of which was held abroad and is now frozen.

Before today, Russia had defaulted on its international debts since the Bolshevik Revolution more than a century ago, when the Russian Empire collapsed and the Soviet Union was established.

Now that the final deadline has passed, the focus will now shift to what investors do next.
Now that the final deadline has passed, the focus will now shift to what investors do next. (AP)

Russia defaulted on its domestic debts in the late 1990s, but was able to recover from that default with the help of international aid.

Investors have been expecting Russia to default for months.

Insurance contracts covering Russian debt have priced in an 80 percent chance of default for weeks, and rating agencies like Standard & Poor’s and Moody’s have placed the country’s debt deep in the junk zone.

HOW DO YOU KNOW IF A COUNTRY IS STANDARD?

Rating agencies can lower the rating to default or a court can decide the matter.

Bondholders who have credit default swaps — contracts that act as insurance policies against default — can ask a committee of representatives from financial institutions to decide whether a default on debt should trigger a payout, which still isn’t a formal declaration of default.

Russia calls any default artificial because it has the money to pay its debts, but says sanctions have frozen its foreign exchange reserves abroad.
Russia calls any default artificial because it has the money to pay its debts, but says sanctions have frozen its foreign exchange reserves abroad. (AP)

The Credit Default Determination Committee — an industry group of banks and investment funds — ruled on June 7 that Russia had failed to pay the required additional interest after making a payment on a bond after its April 4 maturity date.

But the committee postponed further action due to uncertainty about how sanctions might affect a settlement.

The formal way to default is if 25 percent or more of bondholders say they didn’t get their money.

Once that happens, the provisions state that all of Russia’s other foreign bonds are also in default and bondholders can then seek a court order to enforce payment.

Under normal circumstances, investors and the defaulting government typically negotiate a settlement whereby bondholders receive new bonds that are less valuable, but that give them at least partial compensation.

But sanctions prohibit contacts with the Russian Ministry of Finance.

And no one knows when the war will end or how much defaulted bonds may eventually become worth.

In this case, defaulting and suing “may not be the wisest choice,” Auslander said. It is not possible to negotiate with Russia and there are so many unknowns, so the creditors may decide to “hold on for now”.

The last time Russia defaulted was over a century ago
The last time Russia defaulted was over a century ago (AP)

Investors looking to get out of Russian debt are likely already headed for exits, leaving those who may have bought bonds at low prices in hopes of benefiting from a settlement in the long run.

And they may want to remain inconspicuous for a while to avoid being associated with the war.

Once a country defaults, it can be cut off from bond market lending until it defaults and investors regain confidence in the government’s ability and willingness to pay.

But Russia is already cut off from western capital markets, so a return to lending is a long way off anyway.

The Kremlin can still borrow rubles at home, where it largely relies on Russian banks to buy its bonds.

WHAT WOULD BE THE IMPACT OF RUSSIA’S STANDARD?

Western sanctions over the war have forced foreign companies to flee Russia, severing the country’s trade and financial ties with the rest of the world.

Absenteeism would be another symptom of that isolation and disruption.

Investment analysts cautiously assume that a default in Russia would not have the kind of impact on global financial markets and institutions that resulted from a previous default in 1998.

At the time, Russia’s default on domestic ruble bonds prompted the US government to step in and push banks to bail out Long-Term Capital Management, a major US hedge fund whose collapse was feared to have shaken the wider financial and banking system. .

Destroyed Russian tanks litter a road near Irpin in Ukraine. Russia has launched a plan to increase the number of troops for its army after months of fierce fighting. (Getty)

Holders of the bonds, for example funds that invest in emerging market bonds, could incur serious losses.

However, Russia played only a minor role in emerging market bond indices, limiting losses for fund investors.

While the war itself is having devastating consequences in terms of human suffering and higher food and energy prices worldwide, government bond defaults would be “absolutely not systemically important,” said IMF’s Kristalina Georgieva.

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