The war in Ukraine is entering its fourth month and is showing little sign of closure. UK inflation has risen to a 30-year high as prices of commodities such as oil and minerals are surging. Political tension is causing international trade to halt and supply chain bottle necks to persist. The European Union just announced their sixth round of sanctions. The economic landscape has taken damage and the main players; Russia and Ukraine, are bleeding.

The Q1 Russian foreign debt payments on 4 April were looming over the Kremlin as its heavy financial burden has progressively gained significant weight since 24 February when its full-scale invasion of Ukraine was announced. Analysts have claimed Russia’s default on its sovereign debt when a proposal was made by the Kremlin to pay out the Q1 interest in Roubles instead of US Dollars.

Selective Default

Russia’s payments due in the beginning of April include a full bond repayment maturing in 2022 as well as interest payments maturing in 2042. With a grace-period of 30 days, a failure to pay out nearly $650 billion in dollar-denominated debt would be ruled as a so-called “selective default” – when a sovereign state fails to honour certain parts of an agreement but continues to meet its payment obligations in other classes of obligations. This verdict is given by various international credit rating agencies including American S&P Global Ratings, also known as Standard & Poor, who concluded that the full repayment in US Dollars was unlikely. A consensus amongst international credit rating agencies recognising Russia’s selective default would have significant implications on its economy, including the ability to borrow in the future.

The failure to comply with the original agreement would not only be a result of its current financial instability but it more significantly relates to the US Department of the Treasury’s blockage of Russian debt payments with dollars that it holds in US banks. Russia holds hundreds of billions in foreign reserves that have now been frozen, including $38 billion in US banks.

Although previously deemed unlikely by many experts, Russia’s Central Bank chief Elvira Nabiullina shared with journalists on 28 April that although there were “difficulties with payments”, “there cannot be talk of any default”, claiming the overdue payments were completed in full through the London branch of Citibank. This was also confirmed by a senior US government official, stating the payment was not made using the frozen dollar assets stored in US banks. The exact origins of this payment remains unclear however.

A potential foreign debt default would be the first in over a century. The last one being in 1917 when the revolutionary leader at the time, Vladimir Lenin, refused to recognise the debt obligations inherited by the tsarist regime.

What does the future look like?

What now awaits the Kremlin are coupon payments for dollar-denominated bonds and Eurobonds due 27 May combined with sanctions rules due to change before 25 May. These sanctions will only further limit western agents permission to process Russian debt payments, as a temporary license issued by the US Office of Foreign Assets Control (OFAC) for transactions between US persons and the Russian finance ministry is set to expire.

Experts deem it unlikely that Russia will walk out of its current debt repayment issues pain-free, as The Credit Derivatives Determinations committee, comprising of major global investment banks and asset managers, met on 29 April to make plans for a credit default swap auction. This, “solely in order to prepare for the possibility of a Failure to Pay Credit Event.”

The threat of Russia’s foreign debt default is particularly peculiar as the fact that a hefty part of its assets are frozen or under sanctions, leading the core issue to Moscow’s willingness to liquidate cash through other sources rather than its ability to actually fulfil its repayment obligations.

What is inevitable for the foreseeable future is the key role the unfolding of the Russian debt repayment will play for economists, financial institutions and politicians. The world is watching as the Russia Ukraine conflict will continue to dictate our global markets and shape our political landscape. The best-case scenario; an end to the armed conflict and political, socioeconomic and financial stability continues to look distant whilst the fear of a worst-case scenario with only the imagination drawing the limits to the potential global damage remains a dooming possibility.

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