Updated June 27, 2022 at 10:35 AM ET
Russia appears to have defaulted on its international debt for the first time in over a century, after Western sanctions made the country's efforts to pay its overseas creditors impossible.
Here's what happened
Like any country, Russia sold bonds to investors abroad and at home to support its economy, promising to pay interest in euros and dollars. But after Russia invaded Ukraine in February, the United States and Europe pushed to weaken the Russian war chest, freezing the country's access to foreign currency assets held overseas.
This put Russia on default watch as early as the spring. But Moscow kept paying its debts from currency reserves at home. In May, however, the U.S. Treasury blocked even those transfers to American investors.
With that, two Russian interest payments — worth about $100 million combined — got stuck after Russia transferred them out of its coffers in May. On Sunday night, the clock ran out on a grace period for these payments, and several reports say bondholders have not received this money, meaning a default.
However, an official declaration of default is unlikely. Major credit ratings agencies, which might typically declare, face sanctions barring them from Russian business. And investors themselves may prefer to stay out of the limelight as they sort out how they might get at least part of their money back.
Russia rejects this as artificially made by Western sanctions
The Kremlin on Monday called any default label unlawful, because the country does have the money and has been trying to pay. The latest workaround attempt involved Russia transferring rubles through its unsanctioned banks and inviting creditors to convert the money into euros or dollars.
Russian Finance Minister Anton Siluanov has said for weeks that any default declaration would be artificial and manufactured by the West, because Russia had made the payment transfers before they were due, and it was up to the bondholders to claim their money.
Politically, any default chaos would play into President Vladimir Putin's frequent argument at home: that Western sanctions are less about his actions in Ukraine and more about inflicting misery on the Russian people by any means necessary.
The U.S. and Europe, for their part, argue Russia fully controls its financial fate by refusing to stop its war in Ukraine.
In practical terms, little impact is expected immediately
Russia last defaulted on its international debt in 1918, following the Bolshevik Revolution. In 1998, Russia defaulted on ruble-denominated bonds, which roiled global markets on edge from the Asian financial crisis.
But now, Russia already faces most punishments that might befall an economy in default. Marquee businesses like McDonald's, Starbucksand Nike have left. Its financial system is increasingly isolated. The ratings agencies have already downgraded it.
Still, Russia continues to rake in money for its oil and gas exports. And it has managed to artificially prop up the ruble to the strongest level in seven years. Some creditors, whose bonds face a default, might eventually sue Russia to get their money, but that process would be quite messy and would likely take years.
Will the default chip away at Russia's standing with still-friendly countries? Will Russia be able to borrow on the international market going forward? Will it need to, given its energy revenues? Or will sanctions eventually deplete its coffers and push its economy to unravel?
These are some of the long-term questions, as investors decide whether they see default as Russia being cornered or further burning its own bridges with the world.
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Transcript :
A MARTINEZ, HOST:
Russia appears to have defaulted on its foreign currency debt for the first time in over a century. However, there is a bit of a twist because Russia does not consider itself in default because the country says it has the money, but its payments have been blocked by Western sanctions. All right, so what happens next? We have NPR's Alina Selyukh here to explain - what? - in 1918 - the Bolshevik Revolution. That's the last time this has happened. Alina, what does it actually mean that Russia appears to have defaulted?
ALINA SELYUKH, BYLINE: OK. Here's what happened. Like any country, Russia sold bonds to support its economy and promised to pay interest in euros and dollars. But after it invaded Ukraine, the U.S. and Europe wanted to weaken the Russian war chest, and they froze Russia's access to euros and dollars held overseas. Russia kept paying its debts from currency reserves at home. But in May, the U.S. Treasury blocked even those transfers to American investors. That left two Russian interest payments, worth about a hundred million dollars, stuck. They missed a deadline, got a grace period and that clock ran out on Sunday. Reports say bondholders have not received that money, which technically means a default.
MARTINEZ: Technically means a default. So what's Moscow's take on all this?
SELYUKH: Well, you know, the Kremlin today said any default label was absolutely unlawful. For weeks, Russian Finance Minister Anton Siluanov has been saying any defaults would be manufactured, artificial. Russia has been trying to pay. Its latest workaround involved ruble transfers that creditors could convert into euros and dollars. Siluanov argues Russia's obligations are fulfilled. It's up to the bondholders to come claim their money. He was basically saying, we'll do everything we can to lead the horse to water - can't make the horse drink.
And this feeds into the Kremlin's frequent line that the U.S. just wants to inflict misery on Russians - in this case, by forcing a default. The U.S. and Europe, of course, would argue Russia controls all this by refusing to stop its war in Ukraine.
MARTINEZ: And given that Russia seemingly has no intention to end that war, what does a default actually mean in practical terms?
SELYUKH: This is the anti-climactic bit because Russia already faces most punishments that might befall an economy in default. Big businesses, like McDonald's or Nike, have left. It's a financial and political outcast, but it's still getting money for its oil and gas. And the ruble has been artificially boosted to the strongest level in seven years. Here's sovereign debt expert Mitu Gulati from the University of Virginia.
MITU GULATI: Normally, with a default, the big, bad thing that happens is that my reputation is in the mud and the rating agencies downgrade me. Your interest rate at which you borrow skyrockets. Russia's not borrowing from anybody. They've invaded another country. Their reputation being in the mud is not exactly a big concern.
SELYUKH: And frankly, its foreign investors have had weeks to figure out what to do. So in the short term, not much is likely to change.
MARTINEZ: All right, short term - what about the long term?
SELYUKH: That is the question. Some creditors might eventually sue Russia to get that money. That will be super messy. It will take years. Will Russia be able to borrow on the international market going forward? Will its economy unravel? We'll be watching if investors see the default as Russia being cornered or further burning its own bridges with the world.
MARTINEZ: NPR's Alina Selyukh, thanks a lot.
SELYUKH: Thank you. Transcript provided by NPR, Copyright NPR.