US Citizens Fully Prohibited from Transactions with Russia
Bloomberg: "Default Likely Won't Pose Major Problems for Russian Economy"
[Asia Economy Reporter Kim Hyunjung] Due to Western economic sanctions following the invasion of Ukraine, Russia has defaulted on foreign currency-denominated government bond interest payments for the first time in a century.
Bloomberg reported on the 27th (local time) that Russia was supposed to pay investors about $100 million (approximately 129.3 billion KRW) in foreign currency-denominated government bond interest by the agreed date, the previous day, but failed to do so. The original payment date for this interest was the 27th of last month, but a 30-day grace period was applied until the default occurred.
The Russian government claims it has already fulfilled its repayment obligation by sending the interest payments in dollars and euros to Euroclear, an international central securities depository, and that Euroclear will deposit the funds into individual investors' accounts. However, Bloomberg reported that investors are unable to receive the money due to sanctions.
Previously, the US fully prohibited its citizens from transactions with the Russian Ministry of Finance, Central Bank, and Sovereign Wealth Fund, blocking the payment channels for interest. Until the 25th of last month, investors were allowed to receive principal and interest payments on government bonds or stock dividends from Russia, but the grace period was not extended thereafter.
As a result, Russia has faced a default for the first time since declaring a moratorium in 1998. However, the 1998 default targeted ruble-denominated government bonds, not foreign debt. Russia's default on foreign debt is the first in over 100 years; during the socialist revolution in 1918, the Bolsheviks, who led the revolution, refused to acknowledge the debts of the Tsarist regime and declined payment.
Bloomberg evaluated this as a "grim signal" of Russia's exclusion from the West politically, economically, and financially, noting that Russia's central bank foreign exchange reserves have already been frozen and Russian banks have been expelled from the international financial messaging system SWIFT. Nonetheless, given that sanctions have already shocked the Russian economy, this default is largely symbolic and is not expected to significantly hinder Russia's ability to manage domestic economic issues such as inflation.
Official default declarations are generally made by major credit rating agencies, but all these agencies have withdrawn from Russia due to Western sanctions. According to bond documentation, a default occurs if 25% of holders of unpaid bonds agree.
Hassan Malik, Chief Country Analyst at Loomis Sayles & Company, said, "It is very rare for a government with financial resources to be forced into default by external factors," adding, "This will be one of the most significant watershed defaults in history."
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