Moscow argues that default is a technicality and that debt payments have been held up by Western sanctions.
On June 27, Russia defaulted on its foreign debt for the first time since 1918. “Holders of Russia’s sovereign debt had not received coupon payments on two eurobonds worth $100 million [combined] by the time the 30-calendar-day grace period expired, which we consider an event of default under our definition,” said ratings agency Moody’s in an issuer comment.
The default is thought to affect mostly Western bondholders, with so-called friendly or neutral countries such as China and India unlikely to care that much about the default, in terms of their willingness to continue working with Russia, according to Gerard DiPippo, a senior fellow in the Economics Program at the Center for Strategic and International Studies in Washington, DC.
However, Moscow argues that it’s not really in default, as it tried to make the repayment on the coupons but the funds it transferred got stuck at Euroclear Bank. Due to EU sanctions on Russia’s National Settlement Depository because of the war in Ukraine, the Russians attempted to use Euroclear instead.
According to the June 27 comment from Moody’s, “The failure of these payments to reach bondholders follows the expiry of the general license of the US Office of Foreign Assets Control on May 25, which, until then, had allowed US financial institutions involved in the payments to continue to process them.”
“Further defaults on future coupon payments are likely,” it states.
DiPippo says bondholders will need to decide whether to press for immediate repayment by seizing assets. “That will be difficult during a war,” he says, “in part because only overseas assets would be accessible. However, if Russia’s frozen reserves were used to make payment, it would essentially be doing what Russia wants, as Moscow wants to make payment.”
Unlike many emerging markets, Russia has not waived sovereign immunity as a condition of its bonds, DiPippo says. This will complicate legal proceedings and could possibly delay a settlement in the future.