Russia has defaulted on its foreign-currency sovereign debt for the first time since 1918 due to Western sanctions that have shut down payment modes to overseas creditors. Since its invasion of Ukraine on Feb 24, Russia has struggled to make timely payments on $40 Billion of outstanding bonds.
The war has ensured that Russia is effectively cut off from the global financial system and rendered its assets untouchable to many investors, according to India Today. The Kremlin has time and again said that there are no grounds for Russia to default but is unable to pay bondholders despite having enough cash reserves.
The U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) has effectively blocked Russia from making payments. “Since March we thought that a Russian default is probably inevitable, and the question was just when,” Dennis Hranitzky, head of sovereign litigation at law firm Quinn Emanuel, told Reuters. “OFAC has intervened to answer that question for us, and the default is now upon us.”
Despite the formal default being largely symbolic, Russia cannot borrow money internationally at the moment, although the country does not need to – due to its huge oil reserves and gas export revenues. This said, the stigma caused by this default would probably raise its borrowing costs in future.
According to India Today, the payments in question are $100 million in interest on two bonds, one denominated in U.S. dollars and another in euros. Russia was due to pay on May 27. The payments had a grace period of 30 days, which expired on Sunday.
Russia says it has made payments to its onshore National Settlement Depository (NSD), adding that it paid in Euros and Dollars and that it had fulfilled obligations. Some Taiwanese holders of the bonds had not received payments on Monday, said Reuters quoting sources. For many bondholders, not receiving the money owed in time into their accounts constitutes a default.
Though the prospectus has no specified date, legal experts are of the opinion that Russia might have until the end of the following business day to pay its dues to the bondholders.
