Russia has not defaulted on its foreign debt since the aftermath of the 1917 revolution, but its obligations have become a sore point in its economic standoff with Western countries. A default was unimaginable until recently, with Russia rated “investment grade” ahead of its February 24 invasion of Ukraine, which Moscow calls a “special military operation”.
Here are the answers to the key questions:
CAN RUSSIA PAY?
On Monday, Russia was due to make a payment of $649 million to the holders of two of its sovereign bonds. But the US Treasury blocked the transfer, preventing Russia from using part of its frozen currency reserves to service its debt.
Finding an alternative, Russia placed the ruble equivalent of these payments for bondholders of so-called unfriendly nations in special accounts with its National Settlement Depository.
Moscow has a grace period of 30 days from the date of payment, which was April 4.
Analysts say Russia has the means and ability to pay. The country earns billions of US dollars from its energy exports, and while about half of its foreign exchange reserves are frozen, it has hundreds of millions that are unfrozen.
Elina Ribakova, deputy chief economist at the Institute of International Finance, said it was likely a “willingness to pay situation”.
The US Treasury has not banned correspondence banking with Russia, subject to verification, and has granted a license to allow payments relating to servicing Moscow’s sovereign debt until May 25.
All of this means it looks like Russia could still make the payment, if it wanted to, analysts said.
WHAT TYPE OF FAULT?
At its most basic level, a default is a breach of contract, although the term can cover a variety of scenarios.
Default is failure to pay principal, interest or other amounts owed after the expiry of the grace period, according to a paper by restructuring experts at the International Monetary Fund.
However, there are also technical faults due to events such as administrative errors, generally considered by market participants to be minor and quickly corrected.
According to legal experts, payment in the wrong currency, in this case the ruble, constitutes a payment default.
Russia rejected the idea of a default.
“In theory, a default situation could be created, but it would be a purely artificial situation,” Kremlin spokesman Dmitry Peskov said on Wednesday. “There is no reason for a genuine default in payment”.
WHO WOULD REPORT A NON-PAYMENT?
Markets often look to credit rating agencies to declare that a default has occurred. However, a default is a fact, not a credit rating, and with major ratings agencies having withdrawn their ratings of Russia, it is unclear what kind of announcement might be made.
A payment default will have wider ramifications. It could, for example, trigger credit default swaps (CDS) – an insurance policy purchased by investors for such an event. A determination committee will rule on the existence of a “non-payment” event. However, such a decision is usually taken after the grace period has expired.
There are approximately $6 billion worth of CDS contracts outstanding on Russia.
WHAT ELSE COULD HAPPEN?
Russia could unilaterally declare a moratorium – a temporary or permanent suspension of payments.
Done as an announcement or legislation separate from the default, a moratorium can occur before or after the default, according to the IMF.
A government may announce a moratorium as an interim measure to halt payments before initiating debt restructuring, as Mexico did in 1982.
The declaration of a moratorium is also one of the potential triggers for CDS contracts.
WHAT HAPPENS AFTER A NON-PAYMENT?
Debt securities that are at risk of, or have defaulted, are often bought by specialized funds in difficult situations, either in the hope of making money when a restructuring is finally worked out. , either to bring a lawsuit in court for the purpose of obtaining compensation or seizing the assets of the debtor.
However, litigation and asset seizures are time-consuming and expensive processes. Many previous attempts have failed, such as when creditors tried to seize the famous Argentine navy ship, the ARA Libertad, in 2012 because of a debt default a decade earlier or dinosaur fossils. Argentinians exhibited in Europe. (Report by Karin Strohecker; edition by Pravin Char)