Russia missed a deadline to make bond payments on Sunday, a move indicating it is defaulting on international debt for the first time in more than a century after Western sanctions thwarted the government’s efforts to pay foreign investors. The decline adds to efforts to cut off Moscow from global capital markets for years.
About $100 million in dollar and euro interest payments failed to reach investors within a 30-day grace period after a missed May 27 deadline. The postponement period ended on Sunday evening.
A formal declaration of default should come from bondholders, as rating agencies, which normally report when borrowers have defaulted, are banned from reporting on Russia by sanctions. The Credit Derivatives Determinations Committee, a panel of investors that decides whether or not to pay out securities related to defaults, has not yet been asked to make a decision on these bond payments.
But as it turned out, payments hadn’t arrived in bondholders’ accounts by Sunday evening, as required by the bonds’ contracts. On Monday, Russia’s finance ministry said it made the payments in May and turned them over to Euroclear, a Brussels-based clearinghouse, but was subsequently unable to reach bondholders.
Russia rejects the default statement because it has made efforts to pay. Kremlin spokesman Dmitri S. Peskov told reporters Monday that the statements about the omission were “absolutely illegal”.
“The fact that Euroclear withheld this money did not transfer it to the recipients, it is not our problem,” said Mr Peskov. “In other words, there are no reasons to call this situation a default.”
The Treasury Department added that the actions of foreign financial institutions were beyond its control and that “it seems advisable for investors to contact the relevant financial institutions directly” about the payments.
Euroclear declined to comment.
“We can expect Russia to stick with its alternative narrative: The standard isn’t a standard, we tried and it’s not our fault,” said Tim Samples, a professor of legal studies at the University of Georgia’s Terry College of Business and a expert on sovereign debt, adding that Russia has also not submitted to jurisdiction in foreign courts. Still, “that must be a little humbling, even for a country that can survive and wage a war on its hydrocarbon revenues,” he said.
The risk of default arose in late February after Russia invaded Ukraine and imposed sanctions to separate the country from international financial markets. In late May, Russia tried to evade tougher sanctions that cut off access to US banks and bondholders by sending payments to a Moscow-based institution. But in the end, the funds did not quite make it into bondholders’ accounts due to far-reaching US and European sanctions.
News of Monday’s apparent default showed “how strong” international sanctions have been against Russia, a senior US government official said in a background briefing for reporters at the Group of 7 summit in Germany, highlighting the “dramatic” effect on the Russian economy.
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This omission is unusual because it is the result of economic sanctions blocking transactions, not because the Russian government is out of money. Moscow’s finances remain resilient after months of war, with nearly $600 billion in foreign exchange and gold reserves, although about half of that is frozen abroad. And Russia continues to receive a steady influx of money from oil and gas sales. Still, a default would be a blemish on the country’s reputation that will linger in investors’ minds and likely drive up borrowing costs if it is able to tap into 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 the Russian budget. For starters, Russia has already lost access to international investors, traditionally the worst consequence of default.
“The only clear negative outcome of the bankruptcy is that the external market is effectively closed to the Ministry of Finance,” said Sofya Donets, an economist at Renaissance Capital in Moscow. “But it’s already closed.”
The head of Russia’s central bank, Elvira Nabiullina, said this month there would be no immediate consequences of default because there had already been an outflow of investors and the value of Russia’s assets had fallen. The central bank is more concerned about inflation, most recently around 17 percent, and about supporting the economy through a “major structural transformation” following an exodus of foreign companies and imports.
Due to Western sanctions alone, Russia is expected to be without access to large parts of the international capital markets for a long time. Either way, Russia is reluctant to give up its reputation as a reliable borrower, which was badly won after the economic collapse in 1998 when the government defaulted on ruble-denominated bonds amid a currency crisis.
Last month, Russia insisted that it had met its debt obligations by sending money to its paying agent in Moscow, the National Settlement Depository. Since then, the custodian has fallen under European sanctions, further limiting Russia’s ability to pay bondholders. Finance Minister Anton Siluanov has accused the West of artificially producing a default and has threatened legal action against US authorities.
This is Russia’s first major default on foreign debt since 1918, shortly after the Bolshevik Revolution.
On Wednesday, President Vladimir V. Putin signed a decree stating that future payments to holders of debt in dollars or euros would be made through Russian financial institutions and the obligations would be met if they were 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 was due from bonds with 30 and 15 days grace periods. The Treasury Department said it had sent the payments in rubles under the new procedure laid down in the presidential decree. But it remains unclear how foreign investors will access the funds.
Overseas investors held about half of Russia’s $40 billion in outstanding foreign currency debt at the end of last year. As the risk of default increased this year, PIMCO, the investment manager, has seen the value of its Russian bond holdings fall by more than $1 billion, and pension funds and mutual funds with exposure to emerging market debt have also experienced declines.
But exposure to Russian assets is limited in the United States and Europe, as sanctions imposed since Russia’s 2014 annexation of Crimea have discouraged investors who did not want the geopolitical risk.
By international standards, Russia does not have that much debt. According to the International Monetary Fund, government debt was only about 17 percent of gross domestic product last year, one of the few countries with a debt-to-GDP ratio of less than 25 percent. The United States, whose assets are sought after by global investors and considered low-risk, has a debt-to-GDP ratio of 125 percent of GDP
Russia’s low debt levels are partly a result of “this new geopolitical era” since the annexation of Crimea, Ms Donets said. “But it’s also a product of the 1998 default,” she added, when “the Treasury Department 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 loans from international investors for its budget. The Treasury Department has not issued dollar-denominated debt since 2019, when US sanctions prevented US banks from buying the debt outright. It last issued euro-denominated debt in May 2021.
Instead, Russia depended on its oil and gas exports and on dollar revenues that went into reserves and grew the national wealth fund.
“Why borrow and pay extra interest when you are a country that builds oil funds in hard currency, a country that has $600 billion in reserves?” said Mrs Donets.
The war has not changed that calculation. Russia’s current account surplus, a broad measure of trade and investment, has soared as revenues from energy exports soared, capital controls halted investment that fled and sanctions scaled back imports. It helped push the ruble to its highest level in seven years.
If Russia spends more debt, it will lean on local banks and residents in the near term to buy ruble-denominated bonds.
Russia “will not have access to capital markets until the war ends and sanctions are lifted,” said Richard Portes, an economics professor 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’s possible to envision a future where Russia will be able to sell debt in international markets again, analysts say, once 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,” said Mr Portes. “As soon as Russia is back in good political condition and sanctions are lifted.”
“If it’s not a political pariah, it won’t be an economic pariah,” he added.
Reporting contributed by Ivan Nechepurenko† Andrés R. Martinez† Jim Tankersley and Alan Rappeport†
