Russia defaulted on its foreign-currency sovereign debt for the first time in more than a century after failing to make two payments by the Sunday night deadline.
Russia has the money to make a $100m payment and is willing to pay, but sanctions made it impossible to get the payments to international creditors.
The Kremlin had been determined to avoid the default, which is a major blow to the nation's prestige.
Sweeping sanctions imposed by Western powers in response to Russia’s invasion of Ukraine, along with countermeasures from Moscow, have effectively ostracized the country from the global financial system, but so far the Kremlin has managed to find ways to get payments to bondholders on multiple occasions.
US sanctions prevent payment
Attempts to circumvent sanctions took a further blow in late May, however, when the U.S. Treasury Department allowed a key exemption to expire. The waiver had previously allowed Russia’s central bank to process payments to bondholders in dollars through U.S. and international banks, on a case-by-case basis.
Russian Finance Minister Anton Siluanov suggested earlier this month that Russia may have found another means of payment. Moscow wired the $100 million in rubles to its domestic settlement house, but the two bonds in question are not subject to a ruble clause that would allow payment in the domestic currency to be converted overseas.
The Russian finance minister branded the situation "a farce".
The $100m interest payment was due on 27 May. Russia says the money was sent to Euroclear, a bank which would then distribute the payment to investors. But that payment has been stuck there, according to Bloomberg News, and creditors have not received it.
Meanwhile, some Taiwanese holders of Russian bonds denominated in euros have not received interest payments, according to the Reuters news agency, which cited two sources.
The money had not arrived within 30 days of the due date, that is, Sunday evening, and so is considered a default.
Russia offers to pay in Rubles
Default seemed inevitable when the US Treasury decided not to renew the special exemption in sanctions rules allowing investors to receive interest payments from Russia, which expired on 25 May.
The Kremlin now appears to have accepted this inevitability too, decreeing on 23 June stating that all future debt payments would be made in roubles through a Russian bank, the National Settlements Depository, even when contracts state they should be in dollars or other international currencies.
Finance Minister Anton Siluanov admitted foreign investors would "not be able to receive" the payments, according to the RIA Novosti news agency.
Russia, which has offered to pay the debts in roubles, calls any default artificial because it has the money to pay its debts but says sanctions have frozen its foreign currency reserves held abroad.
“There is money and there is also the readiness to pay,” Siluanov said last month. “This situation, artificially created by an unfriendly country, will not have any effect on Russians’ quality of life.”
First Russian default in a century
The last time Russia defaulted on its foreign debt was in 1918, during the Bolshevik Revolution when the new communist leader Vladimir Lenin refused to pay the debts of the Russian Empire.
Russia's last debt default of any kind was in the 1998 as the country was rocked by the rouble crisis during the chaotic end of Boris Yeltsin's regime. At the time Moscow failed to keep up payments on its domestic bonds but managed not to default on its overseas debt.
Investors have expected Russia to default for months. Insurance contracts that cover Russian debt have priced a 80% likelihood of default for weeks, and rating agencies such as Standard & Poor’s and Moody’s have placed the country’s debt deep into junk territory.
Once a country defaults, it can be cut off from bond-market borrowing until the default is sorted out and investors regain confidence in the government’s ability and willingness to pay. But Russia has already been cut off from western capital markets, so any return to borrowing is a long way off anyway.
The Kremlin can still borrow rubles at home, where it mostly relies on Russian banks to buy its bonds.