With tightening sanctions making it increasingly difficult for Russia to pay its debt, the nation is edging closer to its first default in more than a century, credit ratings agency Standard & Poor’s warned in a weekend note, pushing tensions to a breaking point Monday as Moscow officials pledged to take legal action if Western measures to curtail its economy continue.
In a note on Saturday, S&P placed Russia under a selective default, which occurs when an entity defaults on some debt or pays less than is owed, after the nation last Monday made about $649 million worth of coupon payments in the Russian ruble despite an obligation to pay in U.S. dollars.
The ratings agency pointed out Russia has a 30-day grace period before a default is declared but said it doesn’t expect the nation will be able to make the payments in U.S. dollars within the allotted time, nor that investors will be able to convert the ruble payments into U.S. dollars equivalent to the original amount due.
In a statement last week, the Russian Ministry of Finance said it was “forced” to make the payment in rubles “due to the unfriendly [sanctions] by the U.S. Treasury,” and insisted the obligations had been “fulfilled in full.”
Even after S&P’s warning, Moscow officials appeared unlikely to change their mind: “We will sue [if we default]
because we undertook all necessary action so that investors would receive their payments,” Finance Minister Anton Siluanov told pro-Kremlin Izvestia newspaper on Monday, adding that Treasury sanctions blocked an attempted payment in dollars to a U.S. bank.
Though Siluanov did not mention who exactly Russia would target, he said officials would “present in court our bills confirming our efforts to pay both in foreign currency and in rubles,” and acknowledged “it will not be an easy process”; it’s not immediately clear if potential legal action could stave off the historic default.
Though Western economies are largely unexposed to the risk, a Russian default would further cut the nation off from global credit markets and could push it “to suffer a serious recession even more severe than that experienced during the pandemic,” Moody’s Analytics Chief Economist Mark Zandi wrote in a note to clients last month.
“Sanctions on Russia are likely to be further increased in the coming weeks, hampering Russia’s willingness and technical abilities to honor the terms and conditions of its obligations to foreign debt holders,” the company said.
“Russia tried in good faith to pay off external creditors,” Siluanov said Monday. “Nevertheless, the deliberate policy of Western countries is to artificially create a man-made default by all means.”
What To Watch For
In addition to the 30-day deadline, Moody’s notes about $100 million worth of payments are due on May 27.
The economic fallout since Russian President Vladimir Putin ordered an invasion of Ukraine on February 23 has intensified amid a growing list of sanctions targeting vast swaths of the Russian economy—including its energy industry, central bank and wealthiest people. Amid the crippling actions, Russian President Vladimir Putin issued a decree on March 5 allowing for repayment of foreign currency-denominated debt in rubles, a move credit ratings agencies say would effectively amount to a default under contractual terms as the nation becomes increasingly unattractive to global investors. Russia has undergone a slew of unprecedented monetary policy measures to help prop up its ailing currency after it plummeted to a record low against the dollar in early March, including more than doubling domestic interest rates to 20%.
What We Don’t Know
The ruble has recouped losses thanks to Russia’s currency control measures, but it’s unclear how long the recovery may last. After the nation’s central bank said it would relax some of the measures on Monday, the ruble fell about 5%.
U.S. Adds Pressure On Russia By Blocking Bond Payments, Increasing Risk Of Default (Forbes)
Russia’s Creditors May Have To Choose Between Getting Paid In Rubles Or Not Getting Paid At All (Forbes)
Russia to Halt Bond Sales, Threatens Legal Action Over Default (Bloomberg)