Russia pitches into first major external bond default in century

REUTERS: Russia defaulted on its foreign sovereign bonds for the first time since the Bolshevik revolution, as sweeping sanctions effectively cut the country off from the global financial system and rendered its assets untouchable to many investors.

A U.S. official said yesterday the default showed how dramatically the sanctions were impacting Russia’s economy. The official was speaking to reporters as the White House released a fact sheet detailing potential G7 actions to support Ukraine and further stem Moscow’s oil revenues.  “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 actions 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,” the U.S. official added in a briefing on the sidelines of a G7 summit in Germany. Earlier, some bondholders said they had not received overdue interest yesterday following the expiry of a key payment deadline a 
day earlier. 

Russia has struggled to keep up payments on US $ 40 billion of outstanding bonds since its invasion of Ukraine on February 24, as sweeping sanctions have effectively cut the country off from the global financial system and rendered its assets untouchable to many investors.

The Kremlin has repeatedly said there are no grounds for Russia to default but it is unable to send money to bondholders because of sanctions, accusing the West of trying to drive it into an artificial default.
Russia’s efforts to avoid what would be its first major default on international bonds since the Bolshevik revolution more than a century ago hit an insurmountable roadblock in late May when the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) effectively blocked Moscow from making payments. “Since March we thought that a Russian default is probably inevitable and the question was just when,” Dennis Hranitzky, head of sovereign litigation at law firm Quinn Emanuel, told Reuters. “OFAC has intervened to answer that question for us and the default is now upon us.”

A formal default would be largely symbolic given Russia cannot borrow internationally at the moment and doesn’t need to thanks to plentiful oil and gas export revenues. But the stigma would probably raise its borrowing costs in future.

The payments in question are US $ 100 million in interest on two bonds, one denominated in U.S. dollars and another in euros, Russia was due to pay on May 27. The payments had a grace period of 30 days, which expired on Sunday.

Russia’s Finance Ministry said it made the payments to its onshore National Settlement Depository (NSD) in euros and dollars, adding it has fulfilled obligations. Some Taiwanese holders of the bonds had not received payments yesterday, sources told Reuters.  With no exact deadline specified in the prospectus, lawyers say Russia might have until the end of the following business day to pay the bondholders.