Russia announced a default on its foreign currency-denominated sovereign debt for the first time since 1918 on June 27, as Western sanctions cut the Russian Finance Ministry’s access to foreign currency with which to pay its creditors, news agency Bloomberg reported.
According to Bloomberg, on midnight on June 27 Russia missed the last day of a grace period to transact an interest payment of U.S. $100 million to bond holders, and this event triggered a default.
“This is a grim sign of how a country can quickly become an economic, financial and political outsider as its central bank reserves are frozen and its biggest banks are cut off from the global financial system,” the Bloomberg report reads.
Given the scale of damage to the Russian economy and its markets, the default comes more or less as a symbolic move and is unlikely to affect ordinary Russians who are already experiencing double-digit inflation and the worst economic conditions in years.
Countries that skip payments to bond holders usually can’t borrow more money, and for Russia it’s even harder, as this is not a regular default, but one which was brought on by a set of Western sanctions to punish the Kremlin for its military aggression against Ukraine.
During the 1998 financial crisis, Russia went through critical currency devaluation, which is why government of Boris Yeltsin had to announce a default on its domestic debt of $40 billion. The last time Russia went through a full-scale sovereign default was 1918, when the Bolshevik party refused to service any bonds issued by the government of Nicholas II, Russian czar.
Since 1820s, Russia has been one of the most active borrowers on the global bond market, going regularly to London and New York exchanges for funding.
Earlier, Russian dictator Vladimir Putin signed a decree ordering debt and interest payments to be paid off in Russian rubles, but creditors refused to accept payments in Russian currency.
The Russian Finance Ministry has used all the dollars and euros it could access to settle bond payments since the introduction of Western sanctions, while making a regular effort to persuade bond holders to accept payments in rubles.
On May 25, the U.S. administration revoked the Russian Finance Ministry’s license to conduct any actions involving bonds on the U.S. financial markets, including payments to creditors.