How Close is Russia to a Complete Default?

By delving into its limited dollar reserves, Russia looked to avoid defaulting on its international debt. The debt crisis in Moscow, however, is far from ended.

Russia’s finance ministry said Friday that it had transferred $564.4 million to a Citigroup account for a bond due in 2022, and $84.4 million to a Citigroup account for a bond due in 2042, abandoning its plan to use rubles instead of dollars to make late payments on two government bonds. The 30-day grace period for paying late payments was set to end on Wednesday. The administration maintained that US sanctions blocking its vast foreign currency reserves meant it couldn’t pay and that Russia was not to blame for the default, which was the first since the Bolshevik Revolution in 1917. Even if Russia is proven to have made the most recent payments, there are still others that must be made. Furthermore, the United States’ authorization for American bondholders to accept payment on Russian notes expires on May 25, so even if Russia tries to pay, investors will be unable to legally receive the funds.

What Happens Now?

According to rating agencies, if bonds require payment in dollars, paying in rubles is a failure to pay as pledged. One reason Russia would like to pay in rubles rather than foreign currency reserves is that a big portion of them has been frozen abroad. By delving into its limited dollar reserves, Russia looked to avoid defaulting on its international debt. The debt crisis in Moscow, however, is far from ended.

If 25% or more of bondholders allege, they haven’t received their money, a formal default is declared. When that happens, conditions state that all of Russia’s other foreign obligations would be in default as well, and bondholders will be able to seek a court order to force payment. In most cases, bondholders and the defaulting government arrange a settlement in which bondholders are handed new bonds that are worthless nevertheless provide them with some recompense.