On June 27, 2022, Russia defaulted on its international debts for the first time since the 1917 Bolshevik Revolution. Interest payments totaling $100 million were due on May 27, 2022, and a one-month grace period for the payments expired on Sunday night.
The default resulted from sweeping Western sanctions that have effectively ostracized the country from the global financial system, de facto rendering its assets untouchable. Russia has tried to dismiss the damaging consequences of default and the shortages and rising prices confronting ordinary Russians.
This misleading statement from Olga Kovitidi, a senator representing Crimea in the Federation Council, the upper chamber of Russia's parliament, is typical:
“The so-called default of Russia announced by Bloomberg [News] is not real but formal, and the Russians are not in danger. … Everywhere, we work in rubles, which made the ruble stronger. … Russia's reputation is improving, confirmed by the ability of Russians to fulfill their obligations in any extreme circumstances.”
In fact, analysts say Russia’s debt default is a symptom of isolation and disruption under the sanctions that will hurt the country’s credit rating, market access and finance costs for years to come. Not only that, but the ruble is no longer a reserve or freely convertible currency, a stinging blow.
U.S. and European Union economic and financial sanctions in retaliation for the war against Ukraine already have sent more than 1,000 foreign companies fleeing Russia and interrupted the country’s global trade.
The debt default involved payments on two Eurobonds. Russia could not make them because sanctions blocked its ability to pay in euros and dollars. According to Russian economist Konstantin Selyanin, although not immediately, the default will eventually reach further into the day-to-day lives of citizens.
“Foreign companies remaining in Russia will most likely leave because it is indecent to hobnob with an unscrupulous debtor in a decent society,” Selyanin told the Russian-language news site 74.RU. He said Western goods will continue to disappear from store shelves.
The formal default could trigger forced repayments on a large sum of Russia's debt, Chris Weafer, chief executive at the Moscow-based consultancy Macro Advisory and former chief strategist at Sherbank CIB, Russia's largest bank, told the BBC.
“Some parts of that debt will now become automatically due because there will be early repayment clauses in all debt instruments, so if you default on one it usually triggers the immediate demand for payment on the other debts,” Weafer said. “So Russia could certainly face immediate debt repayment of about $20 billion at this stage.”
As Argentina's struggles have showed, a sovereign default creates a bad reputation that can linger. Investors may fear that Russia will continue to put foreign policy interests above those of creditors. And the United States has significant leverage over Russia’s re-entry into global finance, Timothy Ash, a senior strategist at Bluebay Asset Management, told CNBC.
“[G]iven that the U.S. Treasury forced Russia into default, Russia will only be able to come out of default when the U.S. Treasury gives bond holders the green light to negotiate terms with Russia’s foreign creditors,” Ash said.
Default could invite creditors to seize Russia's foreign assets as a form of debt repayment. International sanctions have already allowed countries to take or freeze Russian assets that could be used to pay down outstanding debts.
Kovitidi’s claim of a strong ruble is at best misleading.
While it’s true that the ruble has risen in value against other currencies, the reasons are high global energy prices, including for Russian oil and gas, and tight restrictions on converting the currency under the sanctions.
Until the end of February, the ruble was one of several dozen fully convertible currencies worldwide – even the Chinese yuan did not have such a status. Alexei Kudrin, chairman of Russia's Accounts Chamber, an agency that monitors government spending, acknowledged in April that, “The ruble is no longer a freely convertible currency.”
Kudrin was Minister of Finance in 2006 when the ruble became freely convertible. In an interview last year, he said that the achievement was one of his proudest moments.
In an interview with Radio NVC, a Russian-language radio station based in Chicago, Sergei Aleksashenko, a former deputy Russian finance minister and deputy Russian Central Bank chairman, described the situation as a return to Soviet-era conditions:
“The ruble is an inconvertible currency. The situation is approximately the same as in the Soviet Union: Exporters are obliged to sell foreign exchange earnings, and the Central Bank and the government commission decide who can buy foreign currency in Russia and who cannot.”
Some analysts point out that the Russian government has taken dramatic steps to prop up the ruble’s value after it initially plunged nearly 50 percent immediately after the invasion of Ukraine before bouncing back.
Reuters columnist Pierre Briancon said the Central Bank doubled key interest rates and required exporters to convert their revenues from overseas to rubles.
“But the tools that have been used to prop up the ruble make it look like a Potemkin currency," Briancon wrote, "like the fake facades ordered by the eponymous prince to fool Empress Catherine II into thinking Russian villages were prosperous.”