Russia on Sunday missed a deadline to make bond payments, a move signaling its first default on international debt in more than a century, after Western sanctions thwarted government efforts to pay investors strangers. The delay comes on top of efforts to isolate Moscow from global capital markets for years.
About $100 million in dollar and euro-denominated interest payments failed to reach investors within a 30-day grace period after the May 27 deadline was missed. The grace period expired on Sunday evening.
A formal declaration of default would have to come from bondholders because rating agencies, which normally report when borrowers have defaulted, have been barred by sanctions from reporting on Russia. The Credit Derivatives Determinations Committee, a panel of investors that rules on whether to pay for default-linked securities, has not yet been asked to make a decision on those bond payouts.
But it emerged that payments had not reached bondholders’ accounts on Sunday evening, as required by bond contracts. On Monday, Russia’s finance ministry said it made the payments in May and they were transferred to Euroclear, a Brussels-based clearing house, but was subsequently blocked from reaching the bondholders.
Russia rejects the declaration of default, on the grounds that it has made efforts to pay. Dmitry S. Peskov, the Kremlin spokesman, told reporters on Monday that statements about the default were “absolutely illegal.”
“The fact that Euroclear held that money, didn’t transfer it to the recipients, that’s not our problem,” Peskov said. “In other words, there is no reason to call this situation a default.”
The Department of Finance added that the actions of foreign financial institutions were beyond its control and that “investors seem advised to contact the relevant financial institutions directly” about payments.
Euroclear declined to comment.
“We can expect Russia to stick to its alternative narrative: Fault is not a fault, we tried and it’s not our fault,” said Tim Samples, professor of legal studies at the University of Georgia’s Terry College of Business and a sovereign debt expert, adding that Russia has also not submitted to the jurisdiction of foreign courts. Still, “it must be a little humiliating, even for a country that can survive and sustain a war over its hydrocarbon revenue,” he said.
Default risk emerged in late February after Russia invaded Ukraine and imposed sanctions to cut the country off from international financial markets. In late May, Russia tried to circumvent tougher sanctions that cut off its access to U.S. banks and bondholders by sending the payments to a Moscow-based institution. But ultimately, the funds did not reach bondholders’ accounts due to sweeping US and European sanctions.
News of the apparent default on Monday showed “how severe” international sanctions against Russia have been, a senior US administration official said during a briefing for journalists at the Group of Nations summit. 7 in Germany, highlighting the “dramatic” effect on the Russian economy.
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This default is unusual because it is the result of economic sanctions blocking transactions, not because the Russian government is strapped for cash. Moscow’s finances remain resilient after months of war, with nearly $600 billion in foreign currency and gold reserves, about half of which is frozen overseas. And Russia continues to receive a steady influx of cash from oil and gas sales. Still, a default would be a reputational stain on the country that will linger in investors’ minds and will likely drive up its borrowing costs if it is able to tap international capital markets.
Unlike other major defaults in recent history, such as in Greece and Argentina, this default is expected to have a relatively small impact on international markets and Russia’s budget. On the one hand, Russia has already lost access to international investors, traditionally the worst consequence of a default.
“The only clear negative outcome of the default is that the external market will effectively be closed for the finance ministry,” said Sofya Donets, an economist at Renaissance Capital in Moscow. “But it’s already closed.”
Russian central bank head Elvira Nabiullina said this month that there would be no immediate consequences of a default because there had already been an outflow of investors and a drop in the value of stocks. Russian assets. The central bank is more concerned about inflation, most recently at around 17%, and supporting the economy through “large-scale structural transformation” after an exodus of foreign companies and imports.
Western sanctions alone are expected to lock Russia out of much of the international capital markets for a long time. Either way, Russia has been reluctant to give up its hard-earned reputation as a reliable borrower after its economic collapse in 1998, when the government defaulted on ruble-denominated bonds amid a monetary crisis.
Last month, Russia insisted it had honored its obligations by sending funds to its payment agent in Moscow, the National Settlement Depository. Since then, the custodian has fallen under European sanctions, further restricting Russia’s ability to pay bondholders. Finance Minister Anton Siluanov accused the West of artificially fabricating a default and threatened legal action against US authorities.
This is Russia’s first major default on its foreign debt since 1918, shortly after the Bolshevik Revolution.
On Wednesday, President Vladimir V. Putin signed an executive order stipulating that future payments to holders of debt denominated in dollars or euros would be contracted through Russian financial institutions and that the obligations would be considered fulfilled if paid in rubles and converted. Most bond contracts do not allow payment in rubles.
Over the next two days, nearly $400 million in dollar-denominated debt payments were due from bonds with 30- and 15-day grace periods. The Finance Ministry said it sent the payments, in rubles, using the new procedure provided for by the presidential decree. But it is still unclear how foreign investors will access the funds.
Foreign investors held about half of Russia’s $40 billion in foreign currency debt at the end of last year. As default risk has risen this year, PIMCO, the investment management firm, has seen the value of its Russian bond holdings fall by more than $1 billion, and pension funds and mutual funds exposed. to emerging market debt also saw declines.
But exposure to Russian assets is limited in the US and Europe as sanctions imposed since Russia’s annexation of Crimea in 2014 have discouraged investors who did not want the geopolitical risk.
By international standards, Russia does not have so much debt. Its public debt was only about 17% of gross domestic product last year, according to the International Monetary Fund, one of the few countries with debt ratios below 25%. The United States, whose assets are sought after by global investors and deemed low risk, has a debt ratio of 125% of GDP
Russia’s low level of debt is partly the result of “this new geopolitical era” since the annexation of Crimea, Donets said. “But it’s also a product of the 1998 default,” she added, when “the finance ministry was badly burned.” Since then, the ministry has not been as active in issuing new foreign currency debt, she said.
Russia has not relied on borrowing from international investors for its budget. The Treasury Department has not issued dollar-denominated debt since 2019, when U.S. sanctions barred U.S. banks from buying debt directly. It last issued euro-denominated debt in May 2021.
Instead, Russia has depended on its oil and gas exports, and on those dollar revenues that flowed into reserves and grew the national wealth fund.
“Why would you borrow and pay extra rates when you’re a country that’s hoarding oil funds, hoarding hard currency, a country that has $600 billion in reserves?” said Mrs. Donets.
The war did not change this calculation. Russia’s current account surplus, a broad measure of trade and investment, soared as energy export revenues surged, capital controls prevented investment flight and sanctions reduced imports. It helped push the ruble to its highest level in seven years.
If Russia issues more debt, it will rely on local banks and short-term residents to buy ruble-denominated bonds.
Russia “will not have access to capital markets until the war stops and sanctions are lifted,” said Richard Portes, professor of economics at the London School of Business.
The long-term consequences of a default are unclear due to the unusual nature of the financial breach. But it is possible to envision a future where Russia will be able to sell debt on international markets again, analysts say, if the war ends and Russia’s geopolitical ambitions change. Without Mr. Putin and with hundreds of billions of dollars in unfrozen international reserves, it could return to the markets.
“Access to the capital market can be restored very quickly,” Portes said. “Once Russia is back in political good graces and sanctions are lifted.”
“If it’s not a political pariah, it won’t be an economic pariah,” he added.
The report was provided by Ivan Nechepurenko, Andres R. Martinez, Jim Tankerley and Alan Rappeport.