Et would be a historic event: Russia’s first default in a long time. It is doubted whether it would be the first since the Bolshevik October Revolution more than 100 years ago, because Russia was unable to service creditors during the 1998 ruble crisis. The subjunctive “would be” makes it clear that a lot was still unclear on Monday. As a fact, it has been known since the weekend that the Kremlin did not transfer the interest of 100 million dollars to the creditors in Taiwan by Sunday. These payments should have been made as early as May 27, after which there was a 30-day grace period that expired on Sunday. But lawyers cannot rule out that this grace period will not end until the first working day, Monday.
There was no sign of a moment of shock on the financial markets. The German share index Dax gained 0.8 percent in trading on Monday to 13,225 points. Prices fell slightly on the bond markets, but yields, which have risen significantly since the beginning of the year due to inflation concerns, remained well below the highs recently reached. For months, Russian foreign currency bonds have been trading at rates that price in a default. Not a single security has a price of more than 30 percent of the nominal value (100 percent).
Apparently, the Russian government no longer expects to be able to avert the default. She blames the West. In a phone call to journalists, Presidential Office spokesman Dmitry Peskov said Russia had made the bond payments due in May. The fact that they were blocked by the clearing house Euroclear because of Western sanctions against Russia is “not our problem”. For the US government, on the other hand, it is a default. The news shows how strong the measures taken by the United States and its allies are, a US official said on the sidelines of the G7 summit in Germany. The consequences for the Russian economy are “dramatic”.
So far, obligations have been met despite the war and sanctions
So far, since the attack on Ukraine, which began on February 24, despite the sanctions, Russia has been able to meet its obligations for foreign currency bonds denominated in dollars or euros. Although there had always been a delay in payment, the repayments and interest were received by the creditor before the end of the grace period. The rating agencies usually only determine the default after the grace period has expired. But S&P Global, Moody’s and Fitch are no longer allowed to rate Russia and its debt securities under western financial sanctions. However, the official determination of the default should not violate the goals of the sanctions.
The West’s actions against Russia are unparalleled in the financial sphere. The fact that Russian banks are no longer allowed to participate in the Swift international payment system is the mildest punishment. The freezing of foreign exchange reserves held by Western central banks and commercial banks weighs much more heavily. According to Russian Finance Minister Anton Siluanov, Russia lost control of $300 billion, or more than half of its reserves. But even after that, Russia was able to service bonds. However, exceptions had to be included in the clauses, according to which ruble transfers are possible in addition to payments in dollars or euros.
However, this is not possible for all debt securities, including the two bonds now affected by the default. In addition, the United States has been tightening the screws in recent months. In May, creditors were banned from accepting payments from the Russian state. The US Treasury Department had previously instructed western correspondent banks to stop forwarding Russian payments. Russia then switched debt service entirely to rubles. Under the new Russian terms, foreign currency borrowing obligations will be considered fulfilled when the required amounts are transferred in rubles to the national payment processor NSD. Only NSD has also been affected by the EU sanctions for a few weeks and can no longer participate in payment transactions.
Access frozen Russian fortunes
In this mixed situation, demands became louder and louder in western politics, too, for access to Russian assets lying abroad and currently frozen, in order to use them to finance the reconstruction of Ukraine. Western creditors could also be serviced if they sued Russia for debt service before a court in Europe or the United States, for example.
Should Russian state assets be accessed abroad, Russian Finance Minister Siluanov would see it as the start of a direct conflict with the West. Then completely new conditions would apply. Russia would then have to react very differently, and not just through legal channels, is his blatant warning to the West. Russia’s outstanding volume of foreign currency bonds is $49 billion. A $1 billion debt service is required by the end of the year.
