All Eyes on Moscow as US Pushes Russia Closer to First Ever Debt Default in More Than 100 Years

Russia is being pushed closer to a debt default as the US has ended a legal waiver that allowed Moscow's dollar payments to investors in its sovereign bonds. With the US plugging the payment loophole that was in place after the sanctions were slapped on Russia in the aftermath of the Ukraine war, Russia has said it will service its debts in roubles.

However, payments in roubles will violate the contractual terms in some of Moscow's dollar bonds, which are due for coupon payments this week.

The US had frozen foreign currency reserves held by the Russian central bank at U.S. financial institutions as part of the sanctions imposed on Moscow after the Ukraine war started. However, the Treasury Department had allowed the Russian government to use the funds to make coupon payments on dollar-denominated sovereign debt on a case-by-case basis, Reuters reported.

Kremlin Presidential Palace
Kremlin Presidential Palace in Moscow Wikimedia Commons

However, this facility is being closed as of the start of Wednesday, effectively pushing Moscow into a default, the first time ever after Russia defaulted on a foreign bond payment since 1917.

Russia, however, defaulted on domestic coupon payments in 1998 owing to the lack of funds. Russian finance minister Anton Siluanov said the current situation is nothing like the 1998 scenario, when Moscow did not have the funds to make interest payments. Russia is now facing an "artificial situation created by an unfriendly nation," Siluanov said, according to Bloomberg. "We have the money and the willingness to pay," the minister said.

"The current situation has nothing in common with 1998, when Russia didn't have sufficient funds to pay its debts," Siluanov added.

Russia's plan now is to make ruble payments to foreign investors' type 'C' accounts. However, this means the investors will be able to access the funds through a convoluted process, and have to apply to Russia's National Settlement Depository for completing the process.

Moreover, a rouble repayment will be against the terms for 2026 dollar bond whose coupon payment is due this Friday. Russia will not immediately go into default when they miss dollar payment, as there is a 30-day grace.

Russian Rouble
Russian Rouble Pixabay

The Russian minister had pinned the blame of the default on the West earlier as well. He said the western bloc deliberately pushed Moscow into debt a default. "Russia tried in good faith to pay off external creditors ... Nevertheless, the deliberate policy of Western countries is to artificially create a man-made default by all means," Siluanov said last month.

The minister had also said the government would initiate legal action if the country is 'forced' into a default on its sovereign debt.