Russia is facing mounting economic pressure due to sweeping sanctions imposed by Western nations in response to its invasion of Ukraine. With frozen foreign currency reserves and restricted access to global financial markets, Russia is at risk of defaulting on its sovereign debt obligations. A default occurs when a country fails to make timely payments on its external debt obligations. Russia has averted default so far by using workarounds to pay bondholders, but its ability to continue doing so is in doubt.
What constitutes a default?
A sovereign debt default occurs when a country fails to make principal or interest payments on bonds held by foreign investors on time. There is no definitive arbiter for determining when default occurs, but a failure to pay within 30 days of the due date is commonly used as the threshold.
Russia was due to make nearly $117 million in coupon payments on two dollar-denominated sovereign bonds on May 27, 2022. The payments had a grace period of 30 days, after which Russia would be considered in default if the obligations were not met.
Has Russia actually defaulted?
Russia attempted to make the debt payments prior to May 27 by transferring rubles, Russia’s domestic currency, to a bank account at Russia’s National Settlement Depository. However, sanctions prevented the payment from being converted to dollars and transferred to bondholders. The 30-day grace period expired on June 26, so Russia has technically defaulted on these payments.
However, the legal situation is complex. Russia argues it tried to pay in good faith and should not be faulted for sanctions blocking the payments. Credit rating agencies have stopped short of declaring Russia in default, citing the unsettled nature of the situation.
How has Russia avoided default so far?
Prior to its recent payment snag, Russia managed to avoid default by utilizing several workarounds:
– Tapping frozen foreign reserves: Russia was able to make several payments by gaining access to foreign currency reserves frozen abroad.
– Using ruble payments: Russia attempted to pay bondholders in rubles, which its bonds do not permit. Investors would have to open ruble accounts to receive funds.
– Leaning on banks: Gazprombank, which was not targeted by early sanctions, made payments on Russia’s behalf in March.
– Receiving US approval: The US Treasury’s Office of Foreign Assets Control authorized Russia to make $552.4 million in late May bond payments.
What are the consequences if Russia defaults?
A Russian default would have significant economic and geopolitical ramifications:
Economic impacts
– Russian entities would lose access to international credit markets, raising borrowing costs substantially.
– Russian bonds would be downgraded to “default” status, locking Russia out of capital markets.
– The ruble would weaken and inflation would accelerate, further straining Russia’s economy.
– A default could trigger payouts on billions in credit default swaps, which are used to insure against default risk.
Geopolitical impacts
– Russia’s reputation in financial markets would suffer, complicating future attempts to raise foreign capital.
– Russian oligarchs and businesses could shift assets out of the country to mitigate fallout.
– Europe could suffer disruptions if Russia retaliates by cutting off energy exports.
– Relations between Russia and the West would further deteriorate.
Has Russia ever defaulted before?
Russia has not defaulted on its external debt obligations since 1918, when the Bolshevik revolution resulted in the repudiation of Tsarist-era debt. However, Russia did default on domestic debt in 1998 amid financial crisis, causing a sharp devaluation of the ruble and a banking crisis that required IMF intervention.
More recently, when Russia invaded Crimea in 2014, Western sanctions caused yields on Russian bonds to spike on default fears, though Russia avoided default at that time.
What foreign debt does Russia still need to pay in 2022?
Russia faces $3.5 billion more in sovereign bond payments for the remainder of 2022. Upcoming payments include:
2022 Payments Due
| Date | Amount Due |
| June 23 | $71 million |
| July 22 | $1.2 billion |
| September 15 | $1.8 billion |
| October 26 | $235 million |
| December 20 | $306 million |
In addition to the payments above, Russia owes $2 billion annually in perpetuity to holders of bonds issued in 2013. Known as GDP warrants, principal payments adjust based on Russia’s GDP.
Sanctions have cut off Russia’s ability to roll over maturing debt with new bond issuances. Russia’s 2022 debt obligations exceed $20 billion in total.
What measures can Russia take to avoid default?
Russia still retains alternatives to help service its debts and avoid default, at least in the short term:
– Seeking workarounds to gain access to frozen foreign currency reserves.
– Using energy export revenues, which are not yet sanctioned, to make payments.
– Leveraging state-owned banks and enterprises that are not specifically sanctioned.
– Rerouting payments through non-sanctioned Russian financial institutions.
– Attempting debt restructuring agreements with bondholders.
However, utilizing these options could prompt Western nations to expand sanctions. Long term, Russia will likely struggle to avoid default without sanctions relief permitting access to frozen assets and global markets.
Conclusion
While Russia has managed to avert default so far using workarounds, sanctions have severely constrained its ability to service foreign debt obligations. Russia’s attempt to make a payment in rubles that was rejected marked its first foreign bond default in a century. Additional defaults may follow unless sanctions are eased or Russia finds alternative payment routes. The economic and reputational consequences of a Russian default could be severe, but global ripple effects remain uncertain. Russia retains some tools to stay current on its debts for now, but its long-term default risk appears high.