Double-digit inflation, rising living costs and loan defaults have been headlining the global economy as most countries have fallen in challenging times for the past year. But when Russia joined the list of countries in default of foreign debt in June 2022, it made news worldwide. After missing the payment on two international bonds due in May, marking 104 years since the country defaulted on foreign debt. Russia benefits from the high price of its energy experts, so they have the resources required to make payments, but the sanctions have made it difficult. So when bondholders reported missed payment on the loans, a 30-day grace period was triggered, after which the loan became the default in the designation.
Russia Reacts To Western Sanctions
The unprovoked Ukraine invasion sparked Russia’s ostracizing from the capital market. To seal Moscow from the global capital market, the US and other western countries initiated sanctions which shut down payment routes to creditors. Siluanov has addressed the situation as a ‘farce’, merely a ploy by the West to cut off Russia from the western capital market.
On the other hand, Russia has labelled it an artificial default manufactured, saying it is not only willing to make the payment but also has the resources to do so. Kremlin has further claimed that they have tried to disburse the payments for months, but the Euroclear blocks have prevented intermediaries from transferring payments to creditors.
Russia has tried to go around the sanctions and disburse payments to creditors. Introducing new regulations, Vladimir Putin declared Russia’s currency foreign bond obligations fulfilled once payment has been made to local agents. Under the new policy, the Ministry of Finance made a $400 million interest payment in rubles. However, with underlying bonds not subject to ruble clauses, settlement in local currency is inhibited.
The Takeaway
Although Russia is making an effort to push back against the default designation, the country is currently dealing with its worst economic contraction. It was recently forced to trade its Eurobonds at distressed levels, and until bondholders settle on whether Putin’s new policy is subject to clauses, we can expect more missed payments in the future.