Down Debt

EXPLAINER: What is the impact of a Russian debt default? | Economic news

Russia is set to default on its foreign debt for the first time since the 1917 Bolshevik Revolution, further alienating the country from the global financial system following sanctions imposed over its war in Ukraine.

The country faces a Sunday night deadline to meet a 30-day grace period on interest payments originally due on May 27. But it might take time to confirm a fault.

“While there is a possibility that some magic could happen” and that Russia will get the money through financial institutions to bondholders despite sanctions, “no one is betting on that,” he said. said Jay S. Auslander, one of the top sovereign debt lawyers at Wilk Auslander in New York. “The overwhelming probability is that they won’t be able to because no bank will move the money.”

Last month, the US Treasury Department terminated Russia’s ability to repay its billions in debt to international investors through US banks. In response, the Russian Finance Ministry said it would pay dollar-denominated debts in rubles and offer “the possibility of later conversion into the original currency”.

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Russia calls any default artificial because it has the money to pay its debts, but says the sanctions have frozen its foreign currency reserves held abroad.

“There is money and there is also the will to pay,” Russian Finance Minister Anton Siluanov said last month. “This situation, artificially created by a hostile country, will have no effect on the quality of life of Russians.”

Tim Ash, senior emerging markets sovereign analyst at BlueBay Asset Management, tweeted that the default “clearly isn’t” out of Russia’s control and that sanctions are preventing it from paying its debts because it invaded Europe. ‘Ukraine.

Here are the key things to know about a Russian default:


About $40 billion in foreign bonds, about half to foreigners. Prior to the start of the war, Russia had about $640 billion in foreign exchange and gold reserves, much of which was held overseas and is now frozen.

Russia has not defaulted on its international debts since the Bolshevik Revolution more than a century ago, when the Russian Empire collapsed and the Soviet Union was created. Russia defaulted on its domestic debts in the late 1990s, but was able to recover from this default with the help of international aid.

Investors have been expecting Russia to default for months. Insurance contracts that cover Russian debt have rated an 80% probability of default for weeks, and ratings agencies like Standard & Poor’s and Moody’s have put the country’s debt deep in junk territory.


Rating agencies can lower the default rating or a court can decide the matter. Bondholders who have credit default swaps – contracts that act as default insurance policies – can ask a committee of financial firm representatives to decide whether a the debt must trigger a payment, which is still not a formal declaration of default.

The Credit Default Determination Committee – an industry group of banks and investment funds – ruled on June 7 that Russia had failed to pay the required additional interest after making a payment on a post-debt bond. April 4 due date. But the committee postponed further action due to uncertainty over how the sanctions could affect any settlement.

The formal way to declare a default is if 25% or more of bondholders say they haven’t received their money. Once that happens, the provisions state that all of Russia’s other foreign bonds are also in default, and bondholders could then seek a court order to demand payment.

Under normal circumstances, investors and the failing government typically negotiate a settlement in which bondholders receive new bonds that are worth less but give them at least partial compensation.

But the sanctions prevent relations with the Russian Ministry of Finance. And no one knows when the war will end or how many defaulted bonds might be worth.

In that case, declaring default and suing “might not be the wisest choice,” Auslander said. It is not possible to negotiate with Russia and there are so many unknowns that creditors may decide to “hold on for now”.

Investors who wanted to get out of Russian debt have probably already headed for the exits, leaving those who might have bought bonds at bargain prices in hopes of enjoying a long-term settlement. And they might want to keep a low profile for a while to avoid being associated with war.

Once a country defaults, it may be cut off from borrowing in the bond market until the default is resolved and investors regain confidence in the government’s ability and willingness to pay. But Russia has already been cut off from Western capital markets, so any return to borrowing is far from the case anyway.

The Kremlin can still borrow rubles at home, where it relies mainly on Russian banks to buy its bonds.


War-related Western sanctions have driven foreign companies to flee Russia and cut off the country’s trade and financial ties with the rest of the world. The defect would be one more symptom of this isolation and this disturbance.

Investment analysts cautiously believe that a Russian default would not have the same impact on global financial markets and institutions as an earlier default in 1998. At the time, Russia’s default on national ruble bonds led the US government to step in and call on the banks. to bail out Long-Term Capital Management, a large US hedge fund whose collapse, it was feared, could have shaken the entire financial and banking system.

Bondholders – for example, funds that invest in emerging market bonds – could suffer heavy losses. Russia, however, played only a small role in emerging market bond indices, limiting losses for fund investors.

While war itself has devastating consequences in terms of human suffering and rising food and energy prices around the world, a default on government bonds would “certainly not be systemically relevant”, International Monetary Fund Managing Director Kristalina Georgieva said.

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