The deadline for payment of Russian bonds has passed

A deadline for payment of Russia’s external debt has passed, putting the country on a path to default for the first time in nearly a quarter century after Western countries blocked Moscow’s attempts to circumvent financial penalties.

About $100 million in interest on Russian government bonds came due late Sunday with no sign of payment, marking the end of a 30-day grace period in which the country sought to avoid a total defect.

Russia has ample foreign exchange reserves thanks to oil and gas export revenues, but escalating sanctions following its invasion of Ukraine have frozen the country from the global financial system.

The missed payments would be Russia’s first since defaulting on ruble-denominated bonds in 1998. It would also be the country’s first default on foreign debt since 1918, and comes just as Western nations seek to increase the pressure on Moscow.

G7 leaders meeting in Europe on Sunday sought an agreement to impose a “price cap” on Russian oil as part of efforts to limit Moscow’s ability to finance the war in Ukraine. Ukrainian President Volodymyr Zelensky is expected to join the summit via video link on Monday.

The default originally due on May 27 comes months after Russia’s public debt collapse this year triggered by President Vladimir Putin’s invasion of Ukraine. Bonds maturing in 2036 were trading at around $0.20 per dollar on Monday in Asia.

“It’s pretty much in the price now,” Paul McNamara, emerging markets bond fund manager at GAM, said of a potential default.

Last month, the US Treasury closed a sanctions loophole that would have allowed US investors to receive payments from the Russian government. The EU also imposed sanctions on Russia’s national securities depository in early June, preventing Moscow from transferring dollar payments to international securities depositories, which could then settle transactions for Western customers.

Russian officials, including Finance Minister Anton Siluanov, have accused Western governments of trying to force the country into an “artificial” default and have tried to circumvent sanctions by suggesting Moscow could pay in rubles if dollar payments do not reach bondholders.

Putin signed a decree last week creating a mechanism to make payments due Sunday in rubles, as well as an additional $400 million in payments due Thursday and Friday. However, the terms of these bonds do not contain provisions for making payments in rubles.

The Russian currency also fell following the invasion, and as of Monday was down about 40% against the dollar year-to-date. However, investors did not expect the default to have serious economic consequences for Moscow since the problem preventing the payments was not a lack of funds.

“I think it’s an interesting demonstration of what Americans can do if they want to, but I don’t think it has huge economic implications for Russia,” McNamara said.

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Elaine R. Knight