Russia may not pay its foreign debt for the first time this century as the clock ticks down a pair of overdue interest payments blocked by Western sanctions.
About $ 100 million in interest on Russia’s government debt is owed to bondholders by Sunday night, the end of a 30-day grace period during which the country must make payments to avoid default.
Russia has said it has sent the funds to investors, but financial sanctions imposed on the country since its invasion of Ukraine have hampered Moscow’s ability to gain access to important market infrastructure and pay off foreign debt holders.
The impending bankruptcy will be Russia’s first since 1998, coming after the US Treasury Department closed a loophole in sanctions last month that allowed US investors to receive payments from Moscow. Failure to do so would be a blow to Russia’s prestige and could provoke legal action by some creditors.
“Russia is going bankrupt because of sanctions, because it has invaded Ukraine and is committing war crimes. . . it’s all about his ability to determine what’s going on here, ”said Timothy Ash, an emerging markets strategist at BlueBay Asset Management.
Russia has a lot of foreign currency because of its huge oil and gas revenues, but international sanctions have torn the country out of the global financial system and complicated its ability to pay foreign bondholders.
Initially, the payments due on May 27 were sent to the National Settlement Depository of Russia (NSD). It then usually transfers them to international securities depositories such as Belgium-based Euroclear or Luxembourg’s Clearstream, which settle transactions for clients. However, the EU sanctioned the NSD in early June, suspending the ability of Western institutions to receive payments.
Russian officials, including Finance Minister Anton Siluanov, have repeatedly said that Western governments are trying to force the country into “artificial” bankruptcy and are stubbornly looking for ways to circumvent sanctions, saying Moscow will pay in rubles if dollars cannot reach to bondholders.
“They can say whatever they want, but the contract is a contract and it clearly states how and when it is observed,” Ash said. “As a lender, you just want your money back, apologies are pointless.
Russian President Vladimir Putin signed a decree this week setting out a new mechanism for making upcoming ruble payments, including an additional $ 400 million due on Thursday and Friday, and then allowing investors to convert them into foreign currencies. Unlike some of Russia’s debts, the terms of these bonds do not contain any provisions for making payments in rubles.
Although the sanctions have left little prospect of Moscow returning to international bond markets for the foreseeable future, formal defaults could further complicate any debt attempt and increase borrowing costs once the restrictions are lifted, experts said.
For foreign holders of Russian debt, the damage has already been largely caused by the collapse in bond prices following the invasion of Ukraine. Tatiana Orlova, a leading emerging markets economist at Oxford Economics, said the fact that critical loopholes in sanctions were closed made it incredibly difficult for foreign bondholders to recoup their investments.
As Russia is likely to fall due to sanctions rather than a lack of cash, it is expected to have little impact on its population. But “this will be seen as a major blow to confidence,” Orlova said.
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