Russia defaults on foreign debt for first time since WW I

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Russia defaults on foreign debt for first time since World War I

By Thomas Barrabi

June 27, 2022 10:26am Updated

Russia defaulted on its foreign debt obligations for the first time since 1918 on Monday following months of speculation that crippling Western sanctions in response to the Ukraine war would force the Kremlin into nonpayment.



The historic default occurred after Russia failed to make approximately $100 million in interest payments on two dollar- and euro-denominated international bonds within a 30-day grace period. The payments were originally due May 27.



The White House and other Western officials have anticipated a Russian default for months after sanctions effectively severed the Kremlin’s access to the global economy. The US and other nations imposed sweeping penalties in response to the brutal invasion of Ukraine.



The likelihood of a Russian debt default increased in late May, when the Treasury Department allowed a key payment waiver to expire — ensuring that US banks and individuals could no longer accept bond payments from the Russian government. Russia owes approximately $40 billion in internationally held sovereign debt.



The Kremlin

The Kremlin has decried the default as an “artificial situation” caused by the West.

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The Kremlin, which has continued to rake in huge profits from its oil and gas shipments during the Ukraine war, has decried the default as an “artificial situation” — asserting that it has the money to cover its debts and Western officials blocked payments from reaching bondholders.



“Statements of a default are absolutely unjustified,” Kremlin spokesperson Dmitry Peskov said Monday.



“The fact that Euroclear withheld this money and did not bring it to the recipients is not our problem,” Peskov said, according to Reuters. “There are absolutely no grounds to call such situation a default.”



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The default is largely symbolic for a Russian economy that is already weathering double-digit inflation, major GDP losses and a plunge in the value of its ruble since the invasion began.



The nonpayment spat was also not expected to have a major impact on the global economy, which had already largely priced in a potential Russian default. Russian bonds have traded for cents on the dollar since the invasion began as investors braced for the default, while credit ratings agencies Standard & Poor’s and Moody’s have given Russia’s debt a junk rating.



With Russia already disconnected from SWIFT and other elements of the global financial market, further international borrowing was already untenable. But holders of Russian bonds could face major hits – and a difficult road to recouping their losses in court.



“This is the messiest and most legally uncertain case of sovereign default that I can think of,” Mark Weidemaier, a sovereign-debt specialist and law professor at the University of North Carolina at Chapel Hill, told the Wall Street Journal. “That’s got to be one of many things that makes investors nervous when they think about the prospect of suing the Russian government.”

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