As of Wednesday evening in the US, it was not clear what had happened. Earlier in the day, Russian Finance Minister Anton Siluanov told RIA Novosti that US dollar payments may not reach foreign bondholders as the government’s foreign currency accounts were frozen by US sanctions.
The story continues under the ad
Then Russia will try to pay in rubles rather than dollars, as required by the terms of the two government bonds, Siluanov told TASS earlier this week. But if President Vladimir Putin’s government fails to provide the required dollars within a 30-day grace period, the country will officially go into default, according to ratings agency Fitch.
The looming default highlights Moscow’s pariah status following its February 24 invasion of Ukraine. Russian financial markets are closed for almost three weeks. Foreign corporations have left the country. And now, some Russian government bonds – as recently as last month’s widely traded global assets – are selling for as little as 12 cents on the dollar.
“The sanctions, broadly speaking, were an attempt to isolate Russia from the global economy and financial system in an unprecedented way — and they were successful,” said Blaise Antin, managing director of the emerging markets group at TCW, Los Angeles. based investment firm.
Further clouding the outlook is Putin’s March 5 decree allowing Russia to pay off creditors “associated with countries engaged in hostilities” against it using rubles rather than scarce foreign currency.
The story continues under the ad
According to Mitu Gulati, a public debt specialist at the University of Virginia School of Law, the financial conflict between Russia and the US-led coalition is a throwback to past public debt disputes. In the 1800s, major governments often sold bonds to finance wars and then refused to pay investors from enemy lands.
“It’s a familiar situation, even if it’s unusual in today’s world,” Gulati said. “That’s what happened all the time.”
The interest payments due on Wednesday are the first test of Putin’s approach.
Citibank is an intermediary or “paying agent” authorized to receive interest payments on the bonds and distribute them to investors. A spokeswoman did not respond to a request for comment.
The story continues under the ad
By itself, the default of the Russian government is unlikely to have serious consequences. U.S. sanctions are no longer keeping Putin out of global capital markets, and with oil and gas revenues, there is no urgent need for the government to borrow.
According to the industry association Institute of International Finance (IIF), foreign lenders owe about $62.5 billion, including $21.5 billion that require repayment in dollars and euros.
But a sovereign default could provoke a similar approach by Russian corporations to their loans, which are about four times the amount owed by the Russian government, according to William Jackson, an economist at Capital Economics in London.
The story continues under the ad
Russian companies are still paying their debts. But with the economy shrinking by 30 percent, according to the IIF, and most exports blocked by sanctions, it will be difficult for Russian businesses to keep paying, Jackson said.
Financial institutions, including bond specialist Pimco, will also be forced to bear losses. Earlier this month, ratings agency Moody’s said it predicted that investors would lose up to 65% of their funds invested in Russian government bonds, even after a possible settlement of credit claims.
BlackRock, the world’s largest asset manager, has already admitted it has suffered $17 billion in losses from its investments in Russian stocks and bonds. Shares in the company’s largest exchange-traded fund focused on Russia have fallen 79 percent over the past month.
The story continues under the ad
Banks that have sold insurance against a possible default by the Russian state may also lose out. But their identifiers will only become available after payments are made on these instruments, known as credit default swaps.
While the United States and its allies are waging a financial war on Russia, Moscow has already failed to make some required payments to foreign investors. Earlier this month, the government deposited interest payments on ruble bonds with its National Settlement Depository. The Central Bank of Russia blocked the transfer of money to the accounts of depositors.
Fitch says the move would mean default after a 30-day grace period.
The story continues under the ad
US sanctions should not be an obstacle to Russian dollar payments. Earlier this month, the Treasury Department released guidance allowing U.S. investors to receive interest payments on Russian debt through May 25.
Russia deliberately reduced its reliance on global capital flows after the US and its allies imposed sanctions following Putin’s takeover of the Crimean peninsula in 2014. According to the Bank for International Settlements (BIS) in Basel, Switzerland, since then Russia has drastically reduced its external debt and cut its bank borrowing by almost half.
According to BIS, the global banks in Russia have $121.4 billion at stake. Banks in France, Italy and Austria will suffer the most if Russian banks and corporations are unable to repay their loans.
The story continues under the ad
Today’s debt struggle is in stark contrast to the 1998 financial crisis in Russia. Less than a decade after the fall of the Soviet Union, Moscow was looking to secure its place in the global financial system. Even as the ruble collapsed, then-president Boris Yeltsin prioritized repayments to foreign creditors while the government defaulted on its ruble obligations.
The stance took major hedge fund Long-Term Capital Management by surprise, causing massive losses and raising fears of a wider financial crisis that would require intervention from the Federal Reserve.
Today, most officials do not expect a larger cataclysm.