Russia Threatens Foreign Debt Payments in Devalued Rubles

Russia warned Monday that it may pay foreign debts in rubles, as global sanctions prevent its central bank from accessing nearly half of its $640 billion war chest. Moscow is due to pay $117 million on its Eurobonds Wednesday – in U.S. dollars – but Russia says it may be forced to pay in its highly devalued currency–at least to some bondholders.

Foreign minister, Anton Siluanov, said last week that Russia will pay its debts to “unfriendly” nations such as the U.S., U.K., Japan and the E.U. in its national currency. While he termed the plan as “absolutely fair,” these payments to outside investors are expected in the same currency used to purchase the bonds.

While several Russian banks are banned from the SWIFT international payment system, Sulianov said the Kremlin have asked Western banks to go through with the bond coupon payments.

The result may be a default, possibly this week, even though there is a 30-day grace period built into the bond coupon payments and thus a delay in “technical” default. Bond rating agencies, however, may immediately rate Russia as being in default if it gives clear indication it does not intend to satisfactorily pay the debts.

The International Monetary Fund (IMF) now says a Russian sovereign default is “no longer an improbable event.” Managing Director Kristalina Georgieva notes that while Russia has funds to service the debt, it “cannot access them.”

In an interesting observation, Georgieva also called the $120 billion foreign banks have in Russian exposure “not systemically relevant.” Except, of course, to those particular institutions.

In what amounts to bankruptcy on a national scale, the Kremlin would be unable to pay its foreign debts on bonds held by lenders in other countries.

Sanctions from the U.S. and E.U. have largely isolated Moscow from the world economic system. And multinational companies continue to withdraw from the country. Its stock market has not reopened since Feb. 28, but shares in Russian companies have collapsed in markets elsewhere.

The ruble has fared poorly despite moves by Russia’s central bank to prop it up against sanctions. It is down over 45 percent this year and Russia has suspended foreign currency sales and limited cash withdrawals from foreign currency accounts as its financial isolation drags on.

Russia has not defaulted on foreign debts since the Bolshevik revolutionaries disavowed Tsarist bonds in 1918. Its last domestic currency default came in 1998 in its post-Soviet Union transition as commodity prices collapsed.

But even as daunting as the economic crisis is for Russia domestically, the reality is that the global economy will absorb any Russian default with hardly a ripple across the landscape. Argentina’s 2020 default was roughly on the same scale as Moscow’s would be, and it barely registered in financial markets.