Russia misses bond payment deadline — but does it matter?

On Monday morning, the news broke that Russia’s creditors hadn’t receive interest payments by a Sunday deadline.

A deadline for €100 million in interest payments on two bonds, one denominated in U.S. dollars, the other in euros, had expired on May 27, but a 30-day grace period lapsed on Sunday, Reuters reported.

The news failed to rattle global markets in a serious way. But questions continue to abound: Does this move constitute a default? What does that mean for Russia? What does it mean for the war?

POLITICO has you covered on what just happened.

Has Russia defaulted?

A sovereign default occurs when a government fails to make scheduled interest or principal repayments on a debt. In Russia’s case, it has struggled to service its debt ever since Western sanctions blocked it from accessing nearly half of its foreign reserves and cut it off from financial markets.

In retaliation, Russian President Vladimir Putin signed a decree last week setting up a scheme to service debt payments in rubles, citing “force majeure” and arguing that Russia’s failure to pay in the currency specified by the bonds is due to Western sanctions blocking Russian funds, not lack of cash per se.

Last week, Russian Finance Minister Anton Siluanov told Russian news agency Interfax that it made coupon payments on two eurobonds in rubles due to sanctions on Russia’s National Settlement Depository, the agency responsible for handling debt. However, neither bond allowed for payment in rubles. 

Whether Russia has fulfilled its obligations will likely be the subject of litigation, but in creditors’ eyes, a failure to stick to the terms of debt, which include currency specifications, counts as a default.

An investors committee debated the matter earlier in June, determining that a “failure to pay credit event” by Russia occurred when it failed to meet its debt obligations on $1.9 million interest payments due in May. 

What does it mean for Russia?

In the short term, not much. Observers point out that Russian eurobonds — rated investment grade prior to Russia’s invasion of Ukraine — are already trading at a fraction of their pre-war value, reflecting the default risk is already priced in by market participants.

Moreover, Russia currently doesn’t need to raise funds on the markets thanks to fat export revenue from its oil and gas customers, raking in nearly $100 billion in the first 100 days of the war. 

But a default carries a lot of stigma and increases borrowing costs, affecting Russia’s ability to raise funds on capital markets potentially for years to come. The most likely result of Russia failing to service its foreign debt is further isolation from financial markets.

A looming EU embargo on Russian oil and hastened plans to cease reliance on all Russian fuels by the West mean that Moscow will lose a large share of its foreign income over the medium term.

“This golden goose is cooked two to three years down the line. It might be on slow roast, but the goose will be inevitably cooked,” wrote economist Timothy Ash of Blueray Asset Management. 

What does this mean for the war?

A default is unlikely to have any immediate impact on Russia’s military campaign in Ukraine. The Kremlin can still count on energy-export revenue and significant foreign reserves that are in gold and held in China, which isn’t participating in Western sanctions.

How much debt does Russia owe?

Russia has maintained tight fiscal discipline over the years, with limited amounts of outstanding debt. According to Anton Tabakh at the Carnegie Endowment for International Peace, this comes to around $18 billion in sovereign eurobonds, with $1.2 billion coupon payments due each year, of which nearly 70 percent is held by Russian investors and payable in rubles. That leaves a mere 30 percent at risk of default.

It also has around $40 billion in ruble-denominated bonds, which could be serviced in rubles, but sanctions against the National Settlement Depository prevent Russia from doing so.

In addition, Russian banks and corporations have $90 billion in outstanding bonds, the fate of which is unclear.

“The scale of the problem should not be overestimated,” wrote Tabakh, downplaying the broader market impact.

Is this the first time Russia has failed to service its debt?

No. In 1998 Russia defaulted on nearly $40 billion of local debt and declared a moratorium on foreign debt. And in 1918, the Bolshevik government declared a default on czarist debt.