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Russia Defaults on Foreign Debt for First Time Since 1918

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A Russian state flag flies over the Central Bank headquarters in Moscow, Russia | Image by Reuters

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For the first time since 1918, Russia has defaulted on its foreign debt. The default comes after Western sanctions have affected Russia’s ability to pay its debts.

On Monday, a group of bondholders stated they had not received outstanding interest payments after a critical deadline passed the previous day, Reuters reports. The payments included a grace period of 30 days, which reportedly ended on Sunday.

Since Russia invaded Ukraine on February 24, Western sanctions have attempted to isolate Russia from the international financial system, making it harder for the country to make payments on $40 billion of its unpaid bonds. The U.S. Treasury has also banned Americans from buying Russian stocks and bonds.

After announcements that the Kremlin failed to pay roughly $100 million in interest on two bonds, the White House claims the default showed sanctions imposed by the West on Russia are “working.”

A senior U.S. administration official said at the G7 summit in Germany, “This morning’s news around the finding of Russia’s default, for the first time in more than a century, situates just how strong the reactions are that the U.S., along with allies and partners, have taken, as well as how dramatic the impact has been on Russia’s economy.”

By contrast, analysts have pointed out that Russia’s plentiful natural resources make the country extremely tough against economic sanctions by foreign countries.

Moscow has repeatedly said that western countries have driven Russia into a manufactured default by making it impossible for Russia to send money to bondholders. The Kremlin hit an impossible obstacle to paying its debts late last month when the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) stopped Russian payments from being made.

The head of sovereign litigation at Quinn Emanuel Trial Lawyers, Dennis Hranitzky, told Reuters, “Since March we thought that a Russian default is probably inevitable, and the question was just when. OFAC has intervened to answer that question for us, and the default is now upon us.”

Russia’s Ministry of Finance said it met its foreign debt responsibilities by making euro and dollar payments to its onshore National Settlement Depository (NSD), a Russian non-banking financial institution and central securities depository.

Until shortly before the country invaded Ukraine, Russia was rated investment grade, making a default unlikely.

Russian President Vladimir Putin signed a regulation on Wednesday to launch temporary procedures that give the government 10 days to select banks to oversee payments under a new method, suggesting Russia will consider its debt obligations fulfilled when it pays bondholders in roubles.

The head of corporate crime and investigations at law firm Eversheds Sutherland, Zia Ullah, told Reuters, “Russia saying it’s complying with obligations under the terms of the bond is not the whole story.”

“If you as an investor are not satisfied, for instance, if you know the money is stuck in an escrow account, which effectively would be the practical impact of what Russia is saying, the answer would be, until you discharge the obligation, you have not satisfied the conditions of the bond,” he said.        

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