Russia on the brink of historic debt default as payment period expires

Russian Finance Minister Anton Siluanov (seen here with Russian President Vladimir Putin in 2019) reportedly told Russian newspaper Vedomosti that Moscow will continue to service external debts in rubles, but foreign Eurobond holders will need to open ruble and hard currency accounts with Russian banks in order to receive payments.

Russia could be entering its first major foreign debt default in over a century after a grace period on two international bond payments expired.

The grace period for interest payments of $100 million ended on Sunday. Russia was unable to pay in its ruble currency because of international sanctions.

The country has been ostracized from the global financial system due to the sanctions imposed by the Western powers, but the Kremlin has been able to find ways to pay bondholders.

There were attempts to circumvent sanctions when a key exemption expired. Russia's central bank used to be able to process payments to bondholders in dollars through U.S. and international banks.

Russian finance minister suggested that Russia may have found another way to pay. The two bonds in question are not subject to a ruble clause that would allow payment in the domestic currency to be converted overseas.

According to two sources, some Taiwanese holders of Russian eurobonds have not received the interest payments, indicating that Russia may be entering its first foreign debt default since 1918.

According to the Russian state-owned news agency RIA Novosti, Siluanov said that the situation was a "farce."

A further $2 billion in payments is due before the end of the year, though some of the bonds issued after the beginning of the year are allowed to be paid in alternative currencies.

It may take some time to confirm the default even though the signals are that payments have been held up.

Decades of default?

Russian eurobonds that were trading at 130 cents before the invasion have crashed to between 20 and 30 cents and are now trading at default levels.

Ash said in a note Monday that Russia probably already defaulted on some ruble denominated instruments owed to foreigners in the weeks after the invasion.

Russia's ratings, market access and financing costs will be impacted by this default for a long time. Russia will only be able to come out of default when the U.S. Treasury allows bond holders to negotiate with Russia's foreign creditor.

If a cease-fire falls short of a full peace agreement, Russia's access to foreign financing will remain limited and it will face higher borrowing costs for a long time.

Russian sources of foreign financing beyond the West, such as Chinese banks, would be reluctant to look beyond the headlines.

The risk of being dragged into future debt restructuring talks will be added to lending rates if they are prepared to run the secondary sanctions risks.

People won't lend to Russia because it's more difficult. It means lower investment, lower growth, lower living standards, and a vicious circle of decline for the Russian economy.

Russia has been able to implement successful capital controls that have supported the ruble currency and brought in substantial revenues from energy exports as a result of high oil and gas prices.

The golden goose is cooked two to three years down the line, according to Ash.

Russia faces a collapse in export receipts over the next two to three years because of sanctions and default.

Given his desire to retain some kind of parity with NATO, Putin will struggle to finance military rebuild, which he will be desperate to accomplish.

Ash argued that the diversion of resources could lead to a decline in Russia.