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Russia is not having it easy economically with the Western sanctions as it is set to default on a key Eurobond debt payment that was expected to have expired back on May 27.
As reported by various media platforms including Bloomberg, evidence of the $100 million in total interest payable has not been received as Moscow’s efforts to pay in Ruble were frustrated by international sanctions. This is the first time since 1918 that Russia will be defaulting in repaying its foreign debt
Since the unprovoked invasion of Ukraine by Russia, the country has made attempts to fulfill its repayment obligations for foreign loans through the national currency equivalent of the said loan. This way, it has been able to service these debts, a method that is now proving unsustainable for much older debts.
There is a clause in some of the foreign credits issued to Russia which stipulates that loans issued after 2014 can be paid in the original currency or any other foreign exchange currency. Older loans have more restrictive repayment options. While the current sanctions have been a bottleneck to President Vladimir Putin’s government’s attempt to meet its obligations, the country’s own established law that creditors must hold an account in Russia to receive the rubles is yet another major obstacle.
While finance minister Anton Siluanov has called the purported default a “farce” as he noted that default under the current circumstances is not admissible as the country is willing and able to make the payments.
Impacts of Russia Foreign Debt Defaults
Despite the fact that Russia has the willingness and ability to pay back the $100 million loan, the foreign debt default still comes with a lot of implications for the Russian economy in the long term.
As reported by CNBC, the Russian sovereign’s longer maturity Eurobonds that were trading at 130 cents before the invasion have already crashed to between 20 and 30 cents, and are now trading at default levels.
“Indeed, Russia likely already defaulted on some ruble denominated instruments owed to foreigners in the weeks just after the invasion, albeit having pulled their ratings, the ratings agencies were not able to call this a default,” said Timothy Ash, senior emerging market sovereign strategist at Bluebay Asset Management, “But this default is important as it will impact on Russia’s ratings, market access and financing costs for years to come. And important herein, given the U.S. Treasury forced Russia into default, Russia will only be able to come out of default when the U.S. Treasury gives bond holders the green light to negotiate terms with Russia’s foreign creditors.”
Following this default, Russia’s ability to borrow funds from abroad will always be weighed in connection with this default. Even its strongest allies, including China will always benchmark the country in line with this default should a loan option be on the table.
Besides this current repayment that is due, there is another $2 billion worth of payments that is due by the end of the year and all eyes will be on Russia to see if a default will also be recorded by then.