Russia is just hours away, after months of hovering around the edge of default, from a dramatic moment of the financial war that the US and other countries have waged against it over its invasion of Ukraine.
- Payments to Russian debt holders have been blocked by sanctions
- Russia claims it isn’t in default due to its sufficient funds
On Sunday night, a grace period for about $100 million in missed bond payments that were blocked by wide-ranging sanctions ends. Russia has already disputed the designation. However, if investors fail to have their money by Monday’s deadline, there won’t be any official declaration. According to the bond documents, an “event de default” will occur on Monday morning.
This is largely symbolic, as Russia is an economic, political, and financial outcast in most parts of the world. It does show how the US and Europe have made it impossible for Russia to carry out normal financial business since February’s invasion.
It will be Russia’s first foreign default since 1918 when the Bolsheviks renounced Czarist-era debts. The country was very close to this point earlier in the year, but it managed to escape with a last-ditch switch in payment methods. This alternative route was shut down in May, just days before the $100m due dates. The US had closed a loophole in its sanctions that allowed American investors to receive sovereign bond payments.
The question now is how markets will respond to a defaulted borrower who has the ability and resources but cannot pay.
The default declaration would normally be issued by major rating agencies, but they are prohibited from doing business with Russia. While bondholders can make their own declaration, they might prefer to wait to watch the situation in Ukraine and the impact of sanctions to determine if they will be able to get their money back.
Takahide, an economist at the Nomura Research Institute in Tokyo, said that a declaration of default is symbolic. “The Russian government has already lost out on the chance to issue debt in dollars. Russia cannot borrow from most countries at the moment.
Russia, banks, and individuals have been increasingly penalized for not paying their dues. Russia claims it has met its creditors’ obligations by transferring May payments to a local payment agent. Investors don’t have sufficient funds to pay the transfer fees.
It made some other transfers in rubles earlier this week, despite the fact the bonds involved don’t allow for that option.
Anton Siluanov, Finance Minister, has used “force-majeure”, as a reason for the currency change, calling it a “farce”. According to Bloomberg lawyers, the legal argument of force majeure doesn’t historically include sanctions.
Siluanov stated Thursday that there is ample evidence to suggest that the Russian Federation is artificially preventing it from servicing its foreign sovereign loans. The goal is to use the label of default. “Anyone can declare what they want and can apply such a label. However, anyone who is able to understand the situation will know that this is not a default.
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