Russia has defaulted on its foreign debt, signaling the beginning of a gloomy economic future for the embattled Slavic country.
It was the first time in more than a century that the oil-rich nation is missing a foreign payment deadline. The default is about $100 million in interest on two bonds, whose 30-day grace period expired on Sunday.
Russia’s invasion of Ukraine inspired a series of Western sanctions targeting its financial system, making it difficult for the country to meet its international financial obligations as access to US dollar and euro, which most of its loans must be repaid with, has been greatly limited.
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This exposes Russia to a big challenge. Most of the country’s foreign assets have been frozen, including about half of $640 billion it has racked up in foreign reserves since 2014, when the sanctions started following its annexation of Crimea.
A default means that Moscow’s isolation will see a new height. With a few friends left in the global stage, accessing foreign loans will be near impossible for years. Timothy Ash, a senior sovereign strategist at BlueBay Asset Management described the default as “a disaster for Russia.”
But Russia has denied it defaulted. The Kremlin on Monday described the default label as unlawful, saying that any default may have happened not because the country doesn’t have the money or hasn’t been trying to pay, but because of the Western sanctions. It said the payments due Sunday had been made in dollars and euros on May 27, but the money was stuck with Euroclear, a Belgium-based clearing house.
“Allegations of default are incorrect because the necessary currency payment was made as early as back in May,” Kremlin spokesman Dmitry Peskov said during a regular call with reporters on Monday.
The fact that money transferred to Euroclear was not delivered to investors was “not our problem,” he said, adding that there are no grounds to call it a default.
The major challenge to fulfilling its loan obligations and avoiding default emerged last week when Russian finance minister Anton Siluanov said the country will make its payments in rubles due to the sanctions.
But Moody’s credit ratings agency said Monday that the missed deadline “constitutes a default” and it predicted that Russia would default on more payments in the future.
What does the default mean for Russia’s economy?
Russia’s economy is currently being sustained by high oil prices. Ruble, the country’s currency, has soared to a seven-year high against the US dollar. This means, in the near term, Russia’s economy will have little to lose as a result of the default. However, the question about what happens in the long term remains.
At the conclusion of the G7 Summit held in Germany, the US and its allies agreed on additional sanctions against Russia. The group believes the default is evidence that the sanctions are working.
“This morning’s news around the finding of Russia’s default, for the first time in more than a century, situates just how strong the reactions are that the US, along with allies and partners, have taken, as well as how dramatic the impact has been on Russia’s economy,” a senior administration official said on the sidelines of a G7 summit.
Russia is already unable to borrow abroad and its existing bonds have collapsed in value to pennies on the dollar. A default comes with the usual punishment of being downgraded by credit rating agencies, exit of companies doing business in the defaulting country and being isolated financially – all of these are being experienced by Russia now.
Though Russia-Ukraine’s war-orchestrated high oil price has offered Moscow a rare lifeline amid the sanctions, the G7’s decision to add a new set of sanctions targeting energy, food and security, may be the final nail in the coffin of its crumbling economy.
“As for oil, we will consider a range of approaches, including options for a possible comprehensive prohibition of all services, which enable transportation for Russian seaborne crude oil and petroleum products globally, unless the oil is purchased at or below a price to be agreed in consultation with international partners,” the group said.
Efforts to weather the storm in the oil market are underway. The United States is leading its allies to put Venezuela and Iran’s oil back in the market in a bid to weaken Russia’s weighty position in the oil market. Analysts say that if the plan succeeds, the Kremlin may witness its worst economic crisis in decades.