Russia has defaulted on its foreign debt for the first time since the 1917 revolution, according to reports, further alienating the country from the global financial system after sanctions imposed over its war in Ukraine.
The country missed a deadline of Sunday night to meet a 30-day grace period on interest payments of $100m on two Eurobonds originally due on 27 May, Bloomberg reported on Monday morning.
Some Taiwanese holders of Russian Eurobonds said on Monday that they had not received interest payments due, two sources told Reuters.
Official confirmation of the default was expected to come from international ratings agencies.
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 a insurmountable roadblock in late May when the US treasury department’s office of foreign assets c (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.”
While a formal default would be largely symbolic given Russia cannot borrow internationally at the moment and does need to thanks to plentiful oil and gas export revenues, the stigma would probably raise its borrowing costs in future.
Russia, which has offered to pay the debts in roubles, calls any default artificial because it has the money to pay its debts but says sanctions have frozen its foreign currency reserves held abroad.
“It’s a very, very rare thing, where a government that otherwise has the means is forced by an external government into default,” said Hassan Malik, senior sovereign analyst at Loomis Sayles told Bloomberg. “It’s going to be one of the big watershed defaults in history.”
“There is money and there is also the readiness to pay,” Russian finance minister Anton Siluanov said last month. “This situation, artificially created by an unfriendly country, will not have any effect on Russians’ quality of life.”
Tim Ash, senior emerging market sovereign analyst at BlueBay Asset Management, tweeted that the default “is clearly not” beyond Russia’s control and that sanctions are preventing it from paying its debts because it invaded Ukraine.
Russia owes about $40bn in foreign bonds. Before the start of the war, Russia had around $640bn in foreign currency and gold reserves, much of which was held overseas and is now frozen.
Russia has not defaulted on its international debts since the revolution more than a century ago, when the Russian empire collapsed and the Soviet Union was created.
Russia defaulted on its domestic debts in the late 1990s but was able to recover from that default with the help of international aid.
Investors have expected Russia to default for months. Insurance contracts that cover Russian debt have priced a 80% likelihood of default for weeks, and rating agencies such as Standard & Poor’s and Moody’s have placed the country’s debt deep into junk territory.
Once a country defaults, it can be cut off from bond-market borrowing until the default is sorted out and investors regain confidence in the government’s ability and willingness to pay. But Russia has already been cut off from western capital markets, so any return to borrowing is a long way off anyway.
The Kremlin can still borrow rubles at home, where it mostly relies on Russian banks to buy its bonds.
Western sanctions over the war have sent foreign companies fleeing from Russia and interrupted the country’s trade and financial ties with the rest of the world. Default would be one more symptom of that isolation and disruption.
Investment analysts are cautiously reckoning that a Russian default would not have the kind of impact on global financial markets and institutions that came from its default on domestic debt in 1998. Back then, Russia’s default on domestic ruble bonds led the US government to step in and get banks to bail out Long-Term Capital Management, a large US hedge fund whose collapse, it was feared, could have shaken the wider financial and banking system.