Several sources have reported that Russia is defaulting on foreign debt for the first time since the Bolshevik Revolution in 1918.
Following the expiration of the grace period for its $100 million payment, reports indicate that Russia defaulted on its foreign debt on June 27 for the first time since 1918.
The Kremlin was required to pay $100 million in interest by May 27, but a 30-day grace period was established after investors failed to receive the necessary coupon payments for both bonds denominated in dollars and euros.
According to Russia, Euroclear Bank SA received the money and will thereafter distribute them to investors. But according to Bloomberg, the funds allegedly got stuck there as the West tightened its sanctions against Moscow, preventing creditors from receiving them.
The BBC was informed by Euroclear that it adheres by all sanctions.
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The last time Russia went into default on a foreign debt was in 1918, during the Bolshevik Revolution, when new communist leader Vladimir Lenin refused to settle the outstanding debts of the Russian Empire.
During the country’s financial crisis in 1998, President Boris Yeltsin’s government also missed payments on $40 billion of local debt, but international help allowed the country to recover.
“It’s a very, very rare thing, where a government that otherwise has the means is forced by an external government into default,” Hassan Malik, senior sovereign analyst at Loomis Sayles, told Bloomberg. “It’s going to be one of the big watershed defaults in history.”
After the U.S. Treasury Department last month opted not to extend a loophole that was due to expire on May 25, essentially preventing Russia from being able to pay its billions in debt to international investors through U.S. banks, the default appeared to be inevitable.
Russia responded by announcing it will pay off debts with a dollar value in rubles and provide “the opportunity for subsequent conversion into the original currency.”
The Russian National Settlements Depository (NSD) was sanctioned earlier this month by the European Union after the sanctions loophole was closed. The sanctions were imposed because the NSD “plays an essential role in the functioning of Russia’s financial system” and “thus directly and indirectly enabling the Russian Government in its activities, policies, and resources.”
The NSD ban effectively prevents transfers from Russia outside of the nation.
According to Russia’s Finance Minister Anton Siluanov, who called the situation a “farce” on June 23, the country believes that it has the resources to pay the debt and that the lack of a payment shouldn’t be viewed as a “default” because the Kremlin had already made the payment.
According to the finance minister, there are two reasons why investors cannot get the money.
“The first is that foreign infrastructure—correspondent banks, settlement and clearing systems, depositories—are prohibited from conducting any operations related to Russia. The second is that foreign investors are expressly prohibited from receiving payments from us,” Siluanov said, according to the RIA Novosti news agency.
“Everyone in the know understands that this is not a default at all,” RIA Novosti quoted him saying. “This whole situation looks like a farce.”
The situation had been “artificially created by an unfriendly country,” according to Siluanov, who reiterated last month that Russia was willing to pay the debt. He also claimed that the default would not have an adverse effect on the standard of living for Russians.
About $40 billion in foreign bonds are due from Russia. The country had about $640 billion in foreign currency and gold reserves before going to war with Ukraine.
The majority of this, nevertheless, was stashed abroad and was subsequently frozen in response to the invasion of the neighboring Ukraine on February 24.