Despite the sanctions imposed on Russia, Russia was able to avert the risk of a default for several weeks. And this because the US Treasury Department allowed the use of foreign currencies that Moscow held abroad to pay off foreign debts. Recently that is no longer the case. In fact, in early April, the US Department tightened sanctions and stopped accepting dollars held by Moscow in American banks.
A decision made when Russia had to pay a debt of almost $650 million, namely two bonds maturing in 2022 and 2042. It therefore paid them off on April 4, but in rubles and not in US dollars like the Russian Finance Minister Anton Siluanov announced. For the agency Moody’s this payment in rubles “changes the payment terms compared to the original contracts and can therefore be considered as default” if Moscow does not pay off this debt by May 4, ie by the end of the grace period.
“The bond agreements do not provide for repayment in any currency other than the dollar,” continues Moody’s. And to state: “Although Eurobonds issued after 2018 allow redemptions in rubles under certain conditions, those issued before 2018 (including the 2022 and 2042 bonds) either do not include this alternative currency clause or only allow redemption in other strong currencies (dollars, euros, sterling or Swiss francs)”.
Russia is already in “selective default,” the last stage before general default
After this payment in rubles, the financial rating agency S&P Global Ratings announced on Saturday, April 9 that it downgraded the rating of Russia for its payments in foreign currencies to the level of “Selective Default”. With this selective default rating, S&P estimates that Russia has defaulted on some of its obligations but retains a repayment capacity for future maturities. However, this is the last note before the handicap.
Having been downgraded several times by the various agencies (S&P, Fitch and Moody’s) since the beginning of the war in Ukraine, Russia is a little closer to the general insolvency that the rating agencies had already assessed as imminent in mid-March.
A country is considered to be in default when it is unable to meet its financial obligations to its creditors, which may be sovereigns, financial institutions (International Monetary Fund, World Bank, etc.) or investors in the financial markets. The non-compliance is called partial when the state fails to pay part of its obligations.
The US wants to force Russia into insolvency
The US Treasury Department’s decision to stop allowing Russia to use its foreign-held currencies to pay off foreign debt is intended to bankrupt Moscow. According to one of his spokesmen, Russia must “Choose between depleting remaining dollar reserves or using new incoming revenue or defaulting.”
The idea is to further deplete Russia’s resources to prevent it from spending them to fund its war in Ukraine. On March 24, leaders of the G7 countries and the European Union had already taken unprecedented new measures, unlikely to have been foreseen by Russia, to prevent the Russian central bank from using its international reserves, including gold, to prop up the bloc use rubles or finance war.
“Among the more than 700 sanctions we have imposed, our sanctions on the Central Bank of Russia have been one of the strongest.” The US Treasury Department pointed this out last week. Western sanctions had previously frozen the portion of Russia’s reserves held abroad, around $300 billion.
Russia will go to court in case of default
Russia will take legal action if it is declared in default by the West, the finance minister confirmed in an interview published on Monday, April 11. “We will go to court because we have taken all necessary steps to ensure investors receive their payments.” he explained.
“We will submit our bills to the court, which will confirm our efforts to pay in both foreign currency and rubles. It won’t be an easy process. Despite all the difficulties, we will have to prove our position very actively.” he added, without specifying which legal entity Russia would address.
The minister condemned the strategy implemented by the United States. “In good faith, Russia has tried to repay external creditors by transferring the relevant amounts in foreign currency to settle our debts. Nevertheless, it is the conscious policy of Western countries to artificially create a payment default by any means necessary.”
The minister pointed out that Russia’s foreign debt is about 4,500-4,700 billion rubles (about 52 billion euros at the current rate), or 20% of the total national debt.
According to several analysts, a national bankruptcy now seems imminent, even inevitable. As a reminder, defaulting on its external debt cuts a country off financial markets and makes it difficult to return for years.