# Explainer-Clock ticks down towards a Russian default
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2022-04-08
Category: NEWS
Category URL: https://financedigest.com/category/news
Meta Title: Russia Risks First Default in Over a Century
Meta Description: Find out if Russia will make its sovereign bond repayment in the wake of escalating tensions with Western countries. Expert analysis and key questions answered.
URL: https://financedigest.com/explainer-clock-ticks-down-towards-a-russian-defaulthtml

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LONDON (Reuters) – Russia could face its first sovereign external default in over a century after it made arrangements to make an international bond repayment in roubles earlier this week, even though the payment was due in U.S. dollars.

Russia has not [defaulted on its external debt](https://www.financedigest.com/oil-slumps-5-to-five-week-low-amid-us-debt-default-fears.html "Oil slumps 5% to five-week low amid US debt default fears") since the aftermath of its 1917 revolution, but its bonds have now emerged as a flashpoint in its economic tussle with Western countries. A default was unimaginable until recently, with [Russia rated](https://www.financedigest.com/russia-could-hike-rates-in-2023-if-inflation-risks-have-big-impact-cenbank.html "Russia could hike rates in 2023 if inflation risks have big impact -cenbank") as investment grade in the run up to its Feb. 24 [invasion of Ukraine](https://www.financedigest.com/ukraine-asks-for-south-korea-cybersecurity-aid-amid-russia-invasion.html "Ukraine asks for South Korea cybersecurity aid amid Russia invasion"), which Moscow calls a “special military operation.

Here are answers to key questions:

CAN RUSSIA PAY?

[Russia was due to make a payment of $649 million to holders of two of its sovereign bonds](https://www.financedigest.com/pimco-cut-big-position-in-russia-cds-by-adding-bonds-in-q2.html "PIMCO cut big position in Russia CDS by adding bonds in Q2") on Monday. But the U.S. Treasury blocked the transfer, preventing Russia from using any of its frozen [foreign currency reserves for servicing](https://www.financedigest.com/over-8500-new-jobs-created-in-financial-services-from-foreign-direct-investment-in-2016-17.html "Over 8,500 New Jobs Created In Financial Services From Foreign Direct Investment In 2016-17") its debt.

Coming up with an alternative, Russia placed the [rouble equivalent of those payments for bondholders from so-called unfriendly nations in special accounts at its National Settlement Depository](https://www.financedigest.com/rouble-falls-past-61-vs-dollar-as-conversion-of-depository-receipts-begins.html "Rouble falls past 61 vs dollar as conversion of depository receipts begins").

Moscow has a 30-day grace [period from the payment](https://www.financedigest.com/volume-of-periodic-payment-orders-remains-low-according-to-aon-uk-motor-insurance-study.html "Volume of periodic payment orders remains low, according to Aon UK motor insurance study") date, which was Apr. 4.

Analysts [say Russia](https://www.financedigest.com/renault-to-offload-its-stake-in-lada-maker-for-one-rouble-russia-says.html "Renault to offload its stake in Lada maker for one rouble, Russia says") has the means and ability to pay. The country [receives billions](https://www.financedigest.com/petrofac-hitachi-energy-receive-14-billion-agreement-from-tennet.html "Petrofac, Hitachi Energy receive  billion agreement from TenneT") in U.S. dollars in revenue from energy exports, and while around half its [foreign exchange](https://www.financedigest.com/small-business-strategies-for-foreign-exchange.html "Small business strategies for foreign exchange") reserves are frozen, it has hundreds of millions that are not.

Elina Ribakova, deputy [chief economist at the Institute of International Finance](https://www.financedigest.com/g7-finance-chiefs-agree-on-russian-oil-price-cap-but-level-not-yet-set.html "G7 finance chiefs agree on Russian oil price cap but level not yet set"), said this was likely a “willingness-to-pay situation.

The U.S. Treasury did not ban correspondence banking with Russia, subject to checks, and has granted a license to allow for payments relating to Moscow servicing [sovereign debt](https://www.financedigest.com/analysis-no-china-no-deal-bid-to-break-sovereign-debt-logjams-gets-weary-thumbs-up.html "Analysis-No China, no deal: Bid to break sovereign debt logjams gets weary thumbs up") until May 25.

All this [means it looks like Russia could still make the payment](https://www.financedigest.com/what-emv-tokenization-2-0-means-for-the-payments-industry.html "What EMV Tokenization 2.0 means for the payments industry"), if it wanted to, according to analysts.

WHAT TYPE OF DEFAULT?

At its most basic level, a default is a breach of contract, though the term can cover a variety of scenarios.

Payment default is a failure to pay principal, interest or other amounts due after the grace period has passed, [according to a paper by restructuring experts at the International](https://www.financedigest.com/most-sales-and-marketing-teams-struggle-to-activate-data-in-their-organisation-according-to-new-international-study.html "Most Sales and Marketing teams struggle to activate data in their organisation, according to new international study") Monetary Fund.

However, there are also technical defaults due to events such as administrative errors, generally [viewed by market](https://www.financedigest.com/the-fruit-puree-market-to-stage-innovation-based-eagle-eye-view.html "The Fruit Puree Market To Stage Innovation-Based Eagle-Eye View") participants as minor and swiftly remedied.

Legal [experts say payment](https://www.financedigest.com/from-the-experts-5-payment-technology-trends-to-look-out-for-in-2016.html "FROM THE EXPERTS: 5 PAYMENT TECHNOLOGY TRENDS TO LOOK OUT FOR IN 2016") in the wrong currency, in this case roubles, constitutes a non-payment.

Russia has dismissed the notion of a default.

In theory, a default situation could be [created but this would be a purely artificial](https://www.financedigest.com/artificial-intelligence-is-creating-smart-insurance.html "Artificial Intelligence is creating smart insurance") situation,” Kremlin spokesperson Dmitry Peskov said on Wednesday. “There are no grounds for a real default.”

WHO WOULD CALL A DEFAULT?

[Markets often look to credit-rating agencies to declare a default](https://www.financedigest.com/concern-over-us-default-risk-grips-global-markets-as-talks-resume.html "Concern over US default risk grips global markets as talks resume") has occurred. However, a default is a state of affairs, not a [credit rating](https://www.financedigest.com/credit-suisse-offers-higher-deposit-rates-in-asia-to-woo-the-wealthy-sources.html "Credit Suisse offers higher deposit rates in Asia to woo the wealthy – sources"), and with major ratings agencies having withdrawn ratings on Russia it is unclear what manner of announcements might be made.

A default will have wider ramifications. It could, for example, trigger [credit default swaps](https://www.financedigest.com/explainer-what-are-credit-default-swaps-and-why-are-they-causing-trouble-for-europes-banks.html "Explainer-What are credit default swaps and why are they causing trouble for Europe’s banks?") (CDS) – an insurance policy bought by investors for such a case. A [determinations committee will take a view on whether a “non-payment” event](https://www.financedigest.com/events-will-determine-currency-values-over-2018.html "Events will determine currency values over 2018") has occurred. However, such a decision is generally taken after the grace period has passed.

There are around $6 [billion worth](https://www.financedigest.com/why-a-quiet-revolution-in-the-cloud-is-worth-billions.html "Why A Quiet Revolution In The Cloud Is Worth Billions") of CDS contracts outstanding on Russia.

WHAT ELSE COULD HAPPEN?

[Russia could unilaterally declare a moratorium – a temporary or permanent payment](https://www.financedigest.com/russias-national-payments-system-the-journey-so-far.html "RUSSIA’S NATIONAL PAYMENTS SYSTEM: THE JOURNEY SO FAR") stop.

Made as an announcement or legislation separate from the missed payment, a moratorium can [come before or after the payment](https://www.financedigest.com/e-commerce-without-frontiers-not-when-it-comes-to-payment-2.html "E-commerce without frontiers? Not when it comes to payment") default, according to the IMF.

A government might announce a moratorium as an interim measure to halt payments before launching a [debt restructuring](https://www.financedigest.com/sovereign-debtors-creditors-agree-on-steps-to-jumpstart-debt-restructurings.html "Sovereign debtors, creditors agree on steps to jumpstart debt restructurings"), as Mexico did in 1982.

The declaration of a moratorium is also one of the potential triggers for CDS contracts.

WHAT HAPPENS AFTER A DEFAULT?

Debt obligations at risk of, or already in, default are often snapped up by funds specialising in distressed situations, either hoping to make [money when a restructuring is eventually worked](https://www.financedigest.com/working-with-both-human-ai-and-graph-technology-to-combat-money-laundering.html "Working with Both ‘Human’ AI and Graph Technology to Combat Money Laundering") out or to litigate in courts with the aim of getting compensation or seizing a debtor’s assets instead.

However, litigation and asset seizures are lengthy and [costly processes](https://www.financedigest.com/sdl-helps-lifeplus-engage-with-customers-across-50-countries-and-gain-control-of-translation-costs-and-processes.html "SDL Helps Lifeplus Engage with Customers across 50 Countries and Gain Control of Translation Costs and Processes"). Many previous attempts have been unsuccessful, such as when creditors tried to seize Argentina’s famous [navy vessel](https://www.financedigest.com/new-zealand-navy-vessels-with-supplies-to-reach-tsunami-hit-tonga-on-friday.html "New Zealand navy vessels with supplies to reach tsunami-hit Tonga on Friday"), the ARA Libertad, in 2012 over a debt default a decade earlier or Argentine dinosaur fossils exhibited in Europe.

(Reporting by Karin Strohecker; Editing by Pravin Char)


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