Explainer: The clock is ticking towards a Russian fault


A view shows Russian ruble coins in this illustration taken October 26, 2018. REUTERS/Maxim Shemetov

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LONDON, April 8 (Reuters) – Russia faces its first external sovereign default in more than a century after arranging to repay an international bond in rubles earlier this week, even though payment was due in U.S. dollars .

S&P on Saturday lowered the country’s currency ratings to “selective default” on heightened risks that Moscow will be unable and unwilling to honor its commitments to foreign creditors. Read more

Russia has not defaulted on its foreign debt since the aftermath of its 1917 revolution, but its bonds have now become a flashpoint in its economic struggle with Western countries. A default was unimaginable until recently, with Russia categorized as an investment ahead of its February 24 invasion of Ukraine, which Moscow calls a “special military operation.”

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Here are the answers to the key questions:


Russia was due to pay $649 million to holders of two of its sovereign bonds on Monday. But the US Treasury blocked the transfer, preventing Russia from using any of its frozen foreign currency reserves to service its debt.

Offering an alternative, Russia placed the ruble equivalent of these payments for bondholders of supposedly hostile nations in special accounts at its National Settlement Depository.

Moscow has a 30-day grace period from the date of payment, which was April 4.

Analysts say Russia has the means and the ability to pay. The country receives billions of US dollars in revenue from energy exports, and while about half of its foreign exchange reserves are frozen, it has hundreds of millions that are not.

Elina Ribakova, deputy chief economist at the Institute of International Finance, said it was likely a “willingness to pay situation”.

The US Treasury did not ban correspondent banking with Russia, subject to verification, and granted a license authorizing payments related to servicing Moscow’s sovereign debt until May 25.

All of this means it looks like Russia could still make the payment, if it wanted to, analysts said.


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

Default is failure to pay principal, interest or other amounts owed after the grace period has expired, according to a paper by restructuring experts at the International Monetary Fund.

However, there are also technical failures due to events such as administrative errors, generally considered by market participants to be minor and quickly corrected.

Legal experts say that payment in the wrong currency, in this case ruble, constitutes non-payment.

Russia has ruled out the notion of default.

“In theory, a default situation could be created, but it would be a purely artificial situation,” Kremlin spokesman Dmitry Peskov said on Wednesday. “There is no reason for a genuine default.”


A default is a state of affairs, not a credit rating, although markets often look to rating agencies to declare that a default has occurred.

S&P, giving Russia a “selective default” rating, said it did not expect investors to be able to convert ruble payments into dollar equivalents or the government to convert those payments into a dollar equivalent. 30 day grace period.

With major ratings agencies having withdrawn their ratings on Russia, it’s not entirely clear how the announcements might be made.

A defect will have wider ramifications.

This could, for example, trigger credit default swaps (CDS) – an insurance policy taken out by investors in such a case. A Determination Committee will decide whether a “non-payment” event has occurred. However, such a decision is usually made after the grace period has expired.

There are approximately $6 billion worth of CDS contracts outstanding on Russia.


Russia could unilaterally declare a moratorium – a temporary or permanent stoppage of payments.

Made in the form of an announcement or legislation separate from the missed payment, a moratorium can occur before or after the default, according to the IMF.

A government could announce a moratorium as a stopgap measure to halt payments before initiating debt restructuring, as Mexico did in 1982.

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


Debt securities that are threatened or already in default are often bought up by distress funds, either in the hope of making money when a restructuring is eventually worked out, or to litigate in court with the aim of resolving them. to obtain compensation or seize a debtor’s assets. Instead.

However, litigation and asset seizures are time-consuming and costly processes. Many previous attempts have been unsuccessful, such as when creditors tried to seize The famous ship of the Argentine Navythe ARA Libertad, in 2012 on a default of payment a decade earlier or on Argentinian dinosaur fossils exhibited in Europe.

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Reporting by Karin Strohecker; edited by Pravin Char

Our standards: The Thomson Reuters Trust Principles.


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