(Bloomberg) — After months of teetering on the brink of default, Russia is now just hours away from a dramatic moment in the financial battle the US and others have waged against the Kremlin over its invasion of Ukraine.
Most read by Bloomberg
A grace period for about $100 million in missed bond payments — stalled due to extended sanctions — ends Sunday night. There is no official statement, and Russia is already disputing the appointment. Still, according to bond documents, if investors don’t have their money by the deadline, an “event of default” will occur Monday morning.
For now, it is largely a symbolic development, as Russia is already an economic, financial, and political outcast in most of the world. But it shows how the US, Europe, and others have tightened the screws since the invasion began in February to make it virtually impossible for Russia to conduct business that would otherwise be a normal financial.
For Russia, it will mark its first foreign default since the Bolshevik rejection of tsarist-era debt in 1918. The country came close to such a moment earlier this year but managed to escape last-ditch by switching payment methods. That alternate avenue was closed in May — just days before the $100 million was due — when the US completed a sanctions loophole that allowed US investors to receive sovereign bonds.
Now the question is what happens next as markets face a defaulting borrower with the willingness and resources to pay but cannot.
Major rating agencies would usually be the ones to issue a formal statement, but sanctions prohibit them from doing Russian business. Bondholders could group to make their statement, but they may prefer to wait and watch the war in Ukraine and the level of sanctions as they try to figure out the odds of getting their bond: Money back, or at least part of it.
Story continues
“A standard statement is a symbolic event,” said Takahide Kiuchi, an economist at the Nomura Research Institute in Tokyo. “The Russian government has already lost the opportunity to issue dollar-denominated debt. Already Russia cannot borrow from most other countries.”
As the fines for Russian authorities, banks, and individuals have increasingly closed off payment routes, Russia has argued that it has met its obligations to creditors by transferring May’s payments to a local paying agent, even though investors do not have the money themselves accounts.
Earlier this week, it made other transfers in rubles, even though the bonds in question don’t allow that payment option.
Finance Minister Anton Siluanov cited “force majeure” as a justification for the currency exchange and called the situation a “farce”. According to attorneys who spoke to Bloomberg earlier this month, the legal force majeure argument has historically not included penalties.
“There is every reason to suggest that by artificially preventing the Russian Federation from repaying its foreign debt, the aim is to apply the label ‘default’,” Siluanov said on Thursday. “Everyone can indicate what they want and try applying such a label. But anyone who understands the situation knows this is not a default.”
Most read from Bloomberg Businessweek
