It happens that states can no longer pay their debts – but the Russian default that is now looming is a special case. Therefore, its consequences are still completely unclear.
Russia is apparently facing its first default on foreign debt in more than 100 years. A 30-day period expired on Monday night during which interest on two government bonds in foreign currency had to be paid.
It’s about a total of around 100 million US dollars. If investors didn’t get the money, which is likely given the West’s harsh financial sanctions, it would be the first default on foreign debt since 1918. The more recent default, in 1998, was on domestic-held debt.
The background to the current case is complicated and seeks historical comparison. Russia emphasizes that it is economically able and willing to service its debts. However, this is opposed to severe sanctions, primarily by Western countries, which were imposed in response to Russia’s war against Ukraine. As a result, Moscow can neither access most of its financial reserves in western countries nor transfer domestic reserves to western creditors.
Assessment by rating agencies is missing
Large rating agencies, which would normally determine a default, are currently not allowed to do so due to sanctions. Communities of creditors who could try to legally enforce their claims against Russia have not yet made public appearances. Russia’s Finance Minister Anton Siluanov described the impending default as a “farce” last week. Anyone who understands the events knows that it is not a matter of default.
Experts were initially rather cautious about the matter. The looming default is likely to be more of a symbolic character, explained Dekabank analysts. The background to this is that the direct consequences of a Russian default can initially be regarded as rather limited. For one thing, Russia is not heavily indebted: the ratio of total debt to economic output is currently around twenty percent, which is low by international standards. On the other hand, only a small part of the national debt is in the hands of foreign creditors.
The medium-term consequences of the failure are difficult to foresee. First, at least 25 percent of the affected creditors would have to determine a formal payment default. It is currently questionable whether this would result in a so-called cross-default. In this case, not only the bonds affected by the current default, but all of Russia’s external debt would be considered non-performing. Russia wanted to rule out this case in the end. Whether such unilateral steps would stand up in international courts can at least be regarded as doubtful. As a result, a lengthy legal dispute between Russia and its creditors could be imminent.
