News from Ukraine: Russia defaults on foreign debt, S&P says

Russia defaulted on its foreign debt because it offered bondholders payments in rubles, not dollars, rating agency S&P said.

Russia attempted to pay in rubles for two dollar-denominated bonds that matured on April 4, S&P said in a note Friday. The agency said this amounted to a “selective default” because investors are unlikely to be able to convert rubles into “dollars equivalent to amounts originally owed”.

According to S&P, a selective default is declared when an entity has defaulted on a specific obligation but not all of its debt.

Moscow has a 30-day grace period from April 4 to make principal and interest payments, but S&P said it does not expect to convert them to dollars given Western sanctions that undermine its “willingness and technical ability to honor the terms and conditions”. ” of his obligations.

A full foreign currency default would be Russia’s first in more than a century, when Bolshevik leader Vladimir Lenin repudiated bonds issued by the Tsarist government.

Russia cannot access about US$315 billion of its foreign currency reserves due to Western sanctions imposed following its invasion of Ukraine. Until last week, the United States allowed Russia to use some of its frozen assets to pay back some dollar investors. But the US Treasury has since blocked the country from accessing its reserves at US banks, as part of its efforts to increase pressure on Russian President Vladimir Putin and further reduce his war chest.

JPMorgan estimates that Russia had about $40 billion in foreign currency debt at the end of last year, about half of which was held by foreign investors.


Russia is now considering legal action.

“We will continue, because we have taken all the necessary steps to ensure that investors receive their payments,” Finance Minister Anton Siluanov told the pro-Kremlin newspaper Izvestia on Monday.

“We will show the court proof of our payments, to confirm our efforts to pay in rubles, just as we did in foreign currency. It will not be a simple process,” he added. He did not say who Russia planned to prosecute.

Kremlin spokesman Dmitry Peskov told a news conference last week that any default would be “artificial” because Russia has the dollars to pay – it simply cannot access them.

“There’s no reason for a real default,” Peskov said. “Not even close.”

Russia went to great lengths to artificially prop up the ruble – which fell 40% to less than a US cent in the days following the invasion – including raising interest rates to 20% and by forcing exporters to exchange most of their foreign currency earnings for rubles.

That measure is still in place, but the central bank has moved to ease some other restrictions, Reuters reported on Monday, and last week announced it was cutting interest rates to 17%.

The ruble was trading at 79 to the US dollar on Monday, according to data from Refinitiv. That’s about five percent less than Saturday.

David Goldman and Chris Liakos contributed reporting

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Christi C. Elwood