Russia nearing default – interest period expires


Russia faces the first default in more than 100 years. The country makes no move to pay interest on two bonds.
Image: Reuters

The state has to pay $100 million in interest on two government bonds issued in dollars and euros, but it has made no move to do so. It would be Russia’s first default since the Bolshevik revolution.

Russia is nearing its first default since the Bolshevik revolution more than 100 years ago. A deadline to pay $100 million in interest on two government bonds issued in dollars and euros expires on Sunday. Actually, Russia was supposed to make the payments on May 27, but it didn’t happen. A grace period of 30 days then began, which is now ending. With no specific deadline given in the bond prospectus, lawyers say Russia may also have until the end of the next working day to pay its creditors.

However, there is currently little evidence that investors are getting their money. Since the February 24 invasion of Ukraine, sweeping sanctions have locked Russia out of the global financial system. Since then, Moscow has struggled to make payments on outstanding bonds totaling $40 billion, despite billions in foreign exchange reserves. The Kremlin has repeatedly stated that it sees no reason for default. However, due to the sanctions, it is not possible to transfer money to the bondholders. The West is therefore accused of wanting to force the country into artificial insolvency.

As for short-term new borrowing by Russia, a formal default would be largely symbolic, as Russia is currently unable to borrow internationally anyway, and thanks to its rich oil and gas revenues, it doesn’t have to. But the stigma would likely increase its cost of borrowing in the future — and for many years to come.

According to the Ministry of Finance in Moscow, Russia made the payments for the bonds in euros and dollars to its central securities depository NSD. However, it is considered unlikely that the funds will find their way to the many international holders. For many bondholders, failure to transfer money owed to their accounts on time constitutes a default.

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