Sanctions Trigger First Russian Foreign Debt Default Since 1918

Moscow ( – Western-led sanctions imposed over the conflict in Ukraine appear to have pushed Russia to default on its foreign debt, for the first time in more than a century.

The Kremlin has objected to the “default” designation, stating that it attempted to transfer the necessary funds to its foreign creditors, only to have Western financial institutions refuse to process the payments.

At the same time, economists have argued that having Russia technically default is unlikely to have a significant economic impact since sanctions have already cut off its access to Western capital markets. Moreover, the recent surge in energy prices is providing Russia with a major boost in revenues, making it less in need of foreign borrowing.

The immediate trigger for the default were two bonds worth about $100 million, in dollars and euros. Russia missed the first deadline for the payment on May 27, after which a 30-day grace period kicked in.

The final deadline to make payment was Sunday night. As of Monday, however, the investors had still not received their money, triggering an “Event of Default” under the terms of bond agreement, Bloomberg reported.


The last time Russia defaulted on its foreign debt was in 1918, shortly after the communists seized power. More recently, the Kremlin defaulted on domestic sovereign debt during the Russian financial crisis of 1998, but continued to service its external debt.

The Biden administration sought to frame the development as a victory for its sanctions policy. Speaking to reporters on the sidelines of the G7 summit in Germany, a senior administration official said Monday that the default “situates just how strong the actions are that the U.S., along with allies and partners have taken, as well as how dramatic the impact has been on Russia’s economy.”

By contrast, the Kremlin and the Russian finance ministry issued statements calling reports of a default “absolutely unjustified.” They said Russia had attempted to make the necessary payments but Western financial intermediaries had refused to process the transactions.

There was little sign of market turbulence on Monday in response to the default designation. The ruble closed the day at an official exchange rate of 53.13 rubles to the dollar, about the same level it has been at for the past week.

Since the Kremlin sent troops into Ukraine in late February, the U.S. and its allies in Europe and Asia have imposed unprecedented financial sanctions against Russia. These have included freezing nearly half of Russia’s $640 billion financial reserves, expelling some of its largest banks from the SWIFT international financial messaging system, and introducing new restrictions against trading Russian government bonds.

Initially the Biden administration provided the Russian central bank with an important sanctions exemption enabling it to continue making dollar-denominated payments to its foreign bondholders. On May 25, however, the Treasury Department allowed this loophole to expire, effectively making it impossible for the U.S. financial system to process Russian debt payments.

Last Wednesday, President Vladimir Putin signed a decree that allowed Russia to fulfill its foreign-currency bond obligations in rubles. Under the new law, the government would send ruble payments to the National Settlement Depository, the Russian agency responsible for managing debt. From there, foreign bondholders could retrieve their payments and convert them into the foreign currency of their choice.

Russia’s finance ministry made $400 million worth of bond payments under the new rules on Thursday and Friday.

Finance Minister Anton Siluanov told reporters the decision to pay in rubles should not be regarded as a breach of its debt obligations since “it is impossible to fulfill the payment in full accordance with the issue documentation for reasons beyond our control, or rather, due to the intervention of third parties.”

Since Russia could no longer process its payments in Western currency and through Western financial institutions, it had no other choice but to switch to the ruble and Russian banks, Siluanov said.

He warned Western governments not to seize frozen Russian financial reserves to pay off Moscow’s creditors.

“If we reach the stage of relations where diplomatic assets will also be foreclosed, then this is tantamount to breaking off diplomatic relations and a direct conflict,” he said. “In that scenario, Russia will be forced to respond in ways outside the legal framework.”

Western and Russian economists alike have expressed skepticism that Russia’s default will do much to change its current economic situation. Treasury Secretary Janet Yellen last month downplayed the potential impact of a Russian default, telling reporters Moscow was “already cut off from global capital markets.”

Anton Tabakh, a professor at the Moscow-based National Research University Higher School of Economics, argued that Russia was less vulnerable to the fallout from a foreign debt default since it had a fairly low national debt, most of which is denominated in rubles.

“As a result, Russia and Russian companies will have virtually no debts to investors from countries that imposed sanctions, and the Russian financial market will become largely isolated from global finance,” he wrote in a recent report for the Carnegie Endowment for International Peace. “Over the next few years, especially if Russia’s key interest rate is lowered, its own resources should be sufficient to cover the needs of the budget, banks, and corporations.”

Tabakh admitted that if the sanctions are eventually removed, then having a recent default on its record could potentially make it harder for Russia to persuade Western investors to buy its government bonds. However, he noted that other countries with multiple defaults had successfully returned to global capital markets in the past.


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