InvestorQ : Can you tell me about the recent Russian default, which is happening for the first time since 1918? What does that really mean?
shrinidhi Rajan made post

Can you tell me about the recent Russian default, which is happening for the first time since 1918? What does that really mean?

2 months ago

As the Western sanctions on Russia got tougher, it was always expected that the US would hold back payment of dollars parked abroad. This has largely shut down payment routes to overseas creditors. The default is not because Russia does not have the funds, but they don’t have accessed to the funds. Here is what you must know about the default.

· On Sunday, the grace period available on about $100 million of snared interest payments due May 27 expired. The grace period is normally one month and once the grace period expires, it is technically considered to be a default.

· The reasons are not far to seek. Since March 2022, the central bank’s foreign reserves remain frozen, and the biggest banks are severed from the global financial system. Hence this is more of a forced default and the courts may come into picture now.

· However, the Russian economy is already in shambles and the default may just about be symbolic. Russia is already dealing with double-digit inflation and the worst economic contraction in years. Russian Eurobonds are trading at near distressed levels.

· Russia has maintained its stance all along that it was pushed into default designation, since it always had the funds to cover any bills. Russian external debt is not too high at just about $40 billion and it is willing to pay in roubles, which is breach of contract.

· A formal declaration on the default would have to eventually come from the ratings firms, but European sanctions meant that ratings on Russian entities stand withdrawn. Claims are valid till 3 years so the lenders still have a lot of time to solve their problems.

· This is the first foreign default. During Russia’s financial crisis in 1998, the rouble had collapsed in 1998. At that point, President Boris Yeltsin’s government had defaulted on $40 billion of its local debt. But the last global default was when Lenin had repudiated the Tsarist era debt after the Bolshevik Revolution in 1918.

· Russia has held on to its claim that the cash got trapped after the US Treasury let a sanctions loophole expire. This removed an exemption that allowed US bondholders to receive payments from the Russian sovereign.

· Recently, Vladimir Putin has introduced new regulations that say Russia’s obligations on foreign-currency bonds would be considered as fulfilled once the appropriate amount in roubles had been transferred to the local paying agent.

· If Russia continues to hold on to its stance, then the lenders have access to the diplomatic assets of Russia. But, that is not something most people would relish doing.