Russia faces possible debt default as payment deadline expires

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After a grace period following a deadline to pay interest on over $40 billion in outstanding debts expired the day before, Russia was on the verge of entering its first state of national default in more than a century on Monday.

According to the Kremlin, the designation of default is fictitious because it has the money to pay its debt but is unable to access its foreign reserves because of Western sanctions.

Russian Finance Minister Anton Siluanov stated last month of the impending default, “There is money and there is also the readiness to pay,” calling the circumstance “artificially produced” by “unfriendly” countries.

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What occurs next?

The lives of common Russians, who already struggle with skyrocketing inflation and a deep economic hardship, are also unlikely to be impacted by the default status.

Despite this, the default status is probably going to discourage investors even more from investing any money in Russia, which has fallen further and farther out of favor since its invasion of Ukraine in February. Additionally, it will increase Moscow’s future borrowing expenses.

Under normal conditions, bondholders receive new bonds that are worth less but at least offer partial compensation once investors and the defaulting government come to an agreement. Although negotiations with the Russian finance ministry are prohibited by sanctions, it is impossible to predict how much the defaulted bonds will ultimately be worth because there is no sign of the war coming to an end.

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In a move that suggests Moscow intends to repay bondholders in rubles regardless of the currency the debt is denominated in, Russian President Vladimir Putin signed a decree last Wednesday establishing temporary protection procedures and giving the government 10 days to select banks to handle payments under a new scheme.

International repercussions of default are unlikely.

According to investment professionals, the default won’t likely have a catastrophic effect on world markets, while being problematic for the Kremlin. Kristalina Georgieva, managing director of the International Monetary Fund (IMF), described the incident as “not systemically relevant.”

Any foreign companies still involved in the Russian economy, including funds that invest in emerging countries, will probably suffer significant losses as a result of the turn of events. However, Russia’s contribution to emerging market bond indexes was negligible, which limited the losses to fund investors.

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Since the 1917 revolution that gave birth to the Soviet Union, Russia has not experienced a default. Despite being on the verge of bankruptcy after the breakup of the Soviet Union in the 1990s, Moscow was saved by international assistance, primarily that of the United States.

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