Russia on brink of default as debt deadline looms

Image source, Getty Images

Russia is on the verge of a debt default as the Sunday deadline to make a $100 million interest payment seems certain to be missed.

Russia is willing to pay, but sanctions make it hard for them to make payments to other countries.

A default by the Kremlin would be a big blow to the nation's prestige.

The finance minister of Russia said the situation was a farce.

Since sanctions were imposed by the US and EU, Russia has appeared to be on an inevitable path to default.

The country's access to the international banking networks was restricted due to these.

The Russian government said it wanted to make all of its payments on time and so far it has succeeded.

At the end of Boris Yeltsin's regime there was a default.

On May 27th, the interest payment was due. Russia claims that the money was sent to Euroclear, which would distribute it to investors.

The payment has not been received by the people who are owed it.

A US lawyer who has worked on many government debt cases says that they don't have it. If this money hasn't arrived within 30 days of the due date, that will be considered a default.

Euroclear wouldn't say if the payment was blocked, but it did say that it was in line with all sanctions.

The special exemption in sanctions rules that allowed investors to receive interest payments from Russia expired on May 25th.

All future debt payments will be made in roubles through the National Settlements Depository, even when contracts state they should be in dollars or other international currencies, according to a decree by the Kremlin.

Foreign investors would not be able to receive the payments according to the finance minister.

He explained that this was for two reasons. Correspondent banks, settlement and clearing systems, depositories are not allowed to conduct operations in Russia. Foreign investors can't receive payments from us.

He denied that this was a genuine default because Russia wants to pay and has lots of money to do so.

RIA Novosti quoted him as saying that everyone in the know knows that this is not a default. The whole situation seems to be a farce.

Image source, Getty Images

How a default would be officially declared is not clear.

The credit ratings agencies are not allowed to cover Russia because of the EU sanctions.

The Credit Derivatives Determinations Committee ruled that Russia failed to pay after it didn't pay interest on a late payment.

Russia could be asked to pay the entire value of the debts immediately if the creditor declares a default. The cross-default provisions allow other creditor to claim immediate repayments on their debts.

They could go to court if Russia doesn't pay.

It would have little practical consequences for Russia.

Russia is barred from borrowing in Western markets due to sanctions.

Siluanov said in April that the country has no plans to borrow more.