Russia tried to pay nearly $650 million worth of debt to foreign creditors in rubles this week after banks wouldn’t process their payments in dollars, prompting renewed concern that the country is headed for a default.
The Russian finance ministry said it “considers it fulfilled its obligations in full,” but the securities in question don’t allow payments in rubles, according to bond documents reviewed by Bloomberg. The cost of insuring Russian government debt against a default, which is measured by credit-default swaps, rose to record highs today (April 6).
While Russia still has a 30-day grace period to correct its bond payments, the country will “almost surely” default, says Mitu Gulati, a law professor specializing in sovereign debt at the University of Virginia.
Russian foreign currency reserves in the US are currently frozen, but the Treasury Department had been allowing Russia’s government to access these funds in order to pay off dollar-dominated sovereign debt in some cases. That changed on Monday (April 4), when the Treasury said it would block Russia from using dollars in American banks to make debt payments.
A Treasury spokeswoman told the New York Times the decision was intended to make Russia choose between emptying its domestic dollar reserves or making payments using new revenue. JPMorgan, which had previously processed coupon payments on Russian foreign-currency bonds, elected not to do so this week after the Treasury changed its policy, the Financial Times reported.
Should Russia default on its foreign debt, it would be the first time the country has done so since the Bolshevik Revolution in 1918.
The country could try to fight a default in court under the impossibility doctrine, which is sometimes used as a defense in contract law by sellers who argue an unforeseen event has made it impossible for them to perform. But when the unforeseen event is war, the party asking to be excused from a debt payment usually isn’t the one causing it, says UVA’s Gulati. He adds that Russia is likely to argue that sanctions—not war—have made it impossible for them to pay off their foreign debt, but it’s hard to imagine such an argument holding up in a Western court.
While a Russian default would be historic, the country’s behavior “is already being penalized in the market,” says Gulati. And so far, being cut off from much of the global financial system hasn’t stopped Russia from escalating the war in Ukraine. It’s unclear whether a default—or new sanctions—would change the Kremlin’s calculus.