Is Russia Ready to Default on Its Debt?

Russia might be on the verge of defaulting on its foreign currency loans for the first time in decades, triggering a protracted legal battle with international institutions.

International sanctions on Russia’s Central Bank have blocked many of its foreign exchange reserves. Major rating agencies have downgraded Russia’s national debt; they say that a debt default is now extremely possible due to measures taken by Moscow to offset the damage, such as capital controls. This would be Russia’s first governmental default since defaulting on internal debt in 1998. It would also be the first sovereign default on foreign currency debt since the Bolshevik Revolution in 1918.

Russia in the Mid of a Financial Dilemma

On Wednesday, the Russian government should pay $117 million in interest on two sovereign Eurobonds; the first of four payment deadlines to creditors in March. However, experts are unsure how Moscow can satisfy its financial commitments. Euros and dollars are currently unavailable due to sanctions; hence, Russian Finance Minister Anton Siluanov stated on Monday that Russia would utilize its reserves of Chinese yuan to make certain payments. Alternatively, the administration has warned that payments to “hostile” country creditors will be made in rubles, despite the currency’s dramatic depreciation since Ukraine’s incursion.

Certain Russian FX bonds allow payments in rubles if other currencies are unavailable; however, this does not apply to Wednesday’s payments, according to William Jackson, Capital Economics’ senior emerging markets economist. Jackson indicated that attempting to pay in rubles would be comparable to default; however, with a 30-day grace period before it became official. Western governments have a vested interest in Russia depleting its residual foreign currency holdings to pay creditors. According to Timothy Ash, senior emerging markets sovereign analyst at BlueBay Asset Management, this significantly erodes free Russian FX assets.