Credit rating S&P Global has declared that Russia has defaulted on its foreign debt after Moscow refused to make bondholder payments in any currency than Rubles. The announcement has caused outrage in the Kremlin with Finance Minister Anton Siluanov stating Russia would start legal proceedings if it was declared in default by the West.
Last week Russia paid some of its $650 million U.S. foreign debt in Rubles, due to increased sanctions they were unable to process payments in foreign currency. At this stage, it appears that it would be difficult for investors to convert the Rubles into the equivalent U.S. dollar value which Russia was obliged to pay. Currently, Russia has a 30 day grace period to make the payments in accepted currencies or it will be considered officially in default.
S&P stated that “we think sanctions on Russia are likely to be further increased in the coming weeks, hampering Russia’s willingness and technical abilities to honour the terms and conditions of its obligations to foreign debt-holders.”
Russia has responded to S&P’s declaration, threatening legal action will be taken.
In an interview with Izvestia newspaper, Mr Siluanov voiced his frustration with the situation, saying “we will go to court because we have taken all the necessary measure to ensure that investors receive their payments.”
Going on to say “we will present to the court our invoices confirming our efforts to pay both in foreign currency and in rubles,” without specifying which legal body Moscow would utilise.
On Saturday, credit rating agency S&P said Russia had now entered into “selective default” due to the Kremlin repaying dollar-denominated bonds that matured last week in Rubles. This classification only affects Moscow’s payments in foreign currencies, ratings for its Ruble payments remain unchanged.
Mr Siluanov stated “Russia has tried in good faith to repay external creditors by transferring the corresponding amounts in foreign currency to pay our debt. Nevertheless, the deliberate policy of Western countries is to artificially create a default by all possible means.” Adding “if an economic and financial war is waged against our country, we are obliged to react, but while fulfilling our obligations.”
Up until now Russia has avoided defaulting, as the U.S. Treasury allowed them to use foreign currency held by Moscow overseas to settle foreign debts. Russia was barred from making debt payments using funds held by American banks last week, essentially strangling them economically.
Over the last month, Russia’s economy took a nosedive due to increased international sanctions imposed on them, following the invasion of Ukraine. It is also expected that Russia’s GDP will shrink by 15% this year.
Deputy Chief of the Institute of International Finance Elina yearbook stated that there’s been an “unprecedented shock to the Russian economy.” Russia has not had a recession of this size since the 1990s.”
The Ruble has mainly recovered since, however U.S. Secretary of State Antony Blinken has said it is mainly due to “manipulation” by Russian authorities, claiming the comeback is not sustainable.
Mr. Blinken released a statement on NBC’s Meet the Press, “people are being prevented from unloading rubles.” “That’s artificially propping up the value. That’s not sustainable. So I think you’re going to see that change.”
To counteract some of the severe sanctions imposed by the West, Russia’s central bank imposed strict capital controls.
One U.S. dollar was equivalent to 84.75 Rubles this morning, which is practically the same exchange rate when the war in Ukraine began.