STRATEGIC ASSESSMENT. Russia has rejected claims that is has defaulted on its external debt for the first time in more than a century, telling investors to go to Western financial agents for the cash which Moscow claims was sent but bondholders did not receive.
The White House said on Monday that Russia had defaulted on its international bonds for the first time since the Bolshevik revolution, as sweeping sanctions amid Moscow’s war on Ukraine have effectively cut the country off from the global financial system.
“Statements of a default are absolutely unjustified,” Kremlin spokesperson Dmitry Peskov told a call with reporters on Monday, pointing to a forex coupon payment in May.
“The fact that Euroclear withheld this money and did not bring it to the recipients is not our problem. There are absolutely no grounds to call such a situation a default,” he said.
Euroclear did not immediately respond to a request for comment.
Until last week, Russia kept on paying on its Eurobonds in foreign currency, yet its dollar and euro coupon transfers made in May did not reach investors. Moscow owes $100m in interest on one bond priced in dollars and one priced in euros, which was originally due for payment on May 27.
Russia was set to fall into its first state of sovereign default in over a century on Monday, after a grace period following a deadline to pay interest on some $40 billion in outstanding bonds lapsed the day before.
The Kremlin, for its part, has said the default label is artificial, as it has the funds to pay its debt but it unable to access its foreign reserves due to Western sanctions.
“Statements of a default are absolutely unjustified,” Kremlin spokesman Dimitri Peskov said on Monday in a call with reporters, saying the money was with financial agents, Euroclear.
“The fact that Euroclear withheld this money and did not bring it to the recipients is not our problem. There are absolutely no grounds to call such a situation a default,” Peskov said.
“There is money and there is also the readiness to pay,” Russian Finance Minister Anton Siluanov said last month of the looming default, calling the situation “artificially created” by “unfriendly” powers.
On Monday, the Russian finance ministry said that “actions of foreign financial intermediaries are beyond the Russian finance ministry’s control”, and directed foreign bondholders to speak directly to those withholding the payments that Moscow claims to have made.
“The non-receipt of money by investors did not occur because of lack of payment but due to the third-party actions and which is not directly spelled out as a default situation by issue documentation,” the ministry added.
President Vladimir Putin ordered last week that debt obligations would be considered fulfilled once a rouble payment equal to the forex amount due was made. Bondholders would need to open an account at a Russian bank to receive such a payment.
Bloomberg had earlier reported that Russia has defaulted on its foreign debt after the expiration of the grace period on about $100 million in interest Sunday evening, in what would mark its first such default since the Bolshevik revolution in 1918.
The Kremlin dismissed the reports, saying the payment had been made in foreign currency in May.
“There are no grounds to call this situation a default,” Kremlin spokesman Dmitry Peskov told reporters.
“The fact that the funds have not been transferred to the recipients is not our problem.”
Russian Finance Minister Anton Siluanov echoed the comments, saying: “Everyone who understands, will know that this is not a default.”
The Group of Seven major Western powers banned transactions with Russia’s central bank and froze its assets held in their jurisdictions, worth about $300bn, after Russia invaded Ukraine in February.
The default status is also unlikely to affect the lives of ordinary Russians, already struggling with soaring inflation and steep economic recession.
Despite this, the default status is likely to dissuade investors even further from bringing any money into Russia, which has become a political and financial outcast since its invasion of Ukraine in February. It will also raise Moscow’s borrowing costs in the future.
Under normal circumstances, investors and the defaulting government typically reach a settlement in which bondholders are given new bonds that are worth less but that at least provide partial compensation. But sanctions forbid negotiating with the Russian Finance Ministry, and with no end to the war in sight there is no way to say how much the defaulted bonds will end up being worth.
Last Wednesday, Russian President Vladimir Putin signed a decree to launch temporary protection procedures and give the government 10 days to choose banks to handle payments under a new scheme, suggesting Moscow plans to pay bondholders back in rubles regardless of what currency the debt is owed in.
According to the Finance Ministry, Russia sent the payments on its international bonds on May 20, but that the money did not reach its final recipients as international clearance systems did not authorize the payment.
Russia has been cut off from the global financial system as a result of Western sanctions on the country for its invasion of Ukraine in late February.
“It’s going to be one of the big watershed defaults in history,” Hassan Malik, senior sovereign analyst at Loomis Sayles & Company LP, told Bloomberg of the reported default.
“It’s a very, very rare thing, where a government that otherwise has the means is forced by an external government into default,” Malik said.
Some Western politicians have called to seize the frozen Russian reserves to rebuild Ukraine – and it was such an idea that two high-ranked Russian financial sources said they believed was behind the announcement of default on Monday, and which Moscow considers artificial.
“By announcing a default, they can claim that sanctions work. Economically, financially, assets could be confiscated legally,” one of the two sources said.
Kremlin spokesperson Peskov reiterated on Monday that Russia’s reserves were blocked “unlawfully” and that any attempts to use them would “amount to outright theft”.
“I believe that a financial nuclear bomb was used against us, no country in the history of mankind has experienced such sanctions pressure as Russia is now,” Alexei Moiseev, Russian deputy finance minister, said last week.
Investment analysts have said the default, while problematic for the Kremlin, is unlikely to wreak havoc on global markets. Kristalina Georgieva, managing director of the International Monetary Fund, has called the event “not systemically relevant.”
The turn of events will likely mean serious losses for any international businesses left engaging with the Russian economy, such as funds that invest in emerging markets. Russia, however, played only a small role in emerging market bond indexes before the war, limiting the losses to fund investors.
Russia has not been in a state of default since the 1917 revolution that created the Soviet Union. Although the breakup of the Soviet Union in the 1990s brought it close to default, international aid, particularly from the United States, was able to help Moscow avert total financial disaster (Red/many sources).