Russia in 'Selective Default' on Sovereign Debt

Russia has been ruled to be in "selective default" on $650 million of U.S. dollar-denominated sovereign debt by repaying creditors with rubles instead of dollars, as the bond covenants require. On April 4, 2022, a dollar-denominated Russian government bond matured, and an interest payment came due on another. However, on the same date, the U.S. Department of the Treasury had blocked Russia from making payments on its debt with dollars that it holds in U.S. banks.

Ratings agency S&P Global Inc. (SPGI) indicated late on April 8 that it did not expect that investors could convert the ruble payments into U.S. dollars that were equivalent to the original amount due. As a result, Russia is moving toward its first full default on foreign currency denominated sovereign debt in more than a century. Russia technically has a 30-day grace period to make the aforementioned payments in dollars, as the bond covenants require, but S&P does not expect that this will happen.

Unacceptable Payment

Russia's finance ministry asserts that it has satisfied its obligations "in full" with respect to the aforementioned payments. Ratings agencies respond that neither of the bonds with payments due on April 4 had a provision for payment in a currency other than U.S. dollars. As a result, giving rubles rather than U.S. dollars to the bondholders constitutes a default.

Sanctions Created 'Artificial Default'

In March, Anton Siluanov, Russia's finance minister, accused countries that have frozen Russia's internationally held currency reserves of creating an "artificial default" on its debt. Last week, the Russian finance ministry said that, if these reserves were unfrozen, it could make these bond payments in the appropriate currencies.

Another Complication

As part of the economic sanctions imposed on Russia by the European Union (EU), credit rating agencies will be barred from providing any ratings to Russian entities by April 15. Indeed, rating agencies are complying ahead of that deadline. As a result, by time the 30-day grace periods on the April 4 bond payments expire, the rating agencies technically will no longer be able to rule on whether Russia is in default.