Russia Under ‘Selected Default’ After Making Bond Payments in Rubles Not Dollars

Festive day of November in the Moscow Kremlin in the early autumn morning.
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Rating agency S&P Global Ratings placed Russia under a “selected default’ rating, following the country offering bondholders payments in rubles, not dollars.

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“Sanctions on Russia are likely to be further increased in the coming weeks, hampering Russia’s willingness and technical abilities to honor the terms and conditions of its obligations to foreign debtholders,” the company said, according to the Wall Street Journal.

CNN — citing the S&P note — reports that Russia attempted to pay in rubles for two dollar-denominated bonds that matured on April 4, which amounted to a “selective default” because investors are unlikely to be able to convert the rubles into dollars equaling the amounts due.

Moscow has a grace period of 30 days from April 4 to make the payments of capital and interest, but S&P said it does not expect it will convert them into dollars given Western sanctions that undermine its “willingness and technical abilities to honor the terms and conditions” of its obligations, CNN added.

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Finance Minister, Anton Siluanov told the Russian press this morning the country will sue if the country is forced into default. “We will present in court our bills confirming our efforts to pay both in foreign currency and in roubles. It will not be an easy process. We will have to very actively prove our case, despite all the difficulties,” he said, adding, “Russia tried in good faith to pay off external creditors.”

On April 4, the Treasury Department blocked Russia from using dollars held in American banks for its bond payments, and the transactions weren’t completed by JPMorgan, and subsequently, the Russian finance ministry said it paid the debt in rubles, the New York Times report.

While the finance ministry said it considered its debt obligations to have been fulfilled “in full,” the rating agencies have said that payment in a currency different from the one that was agreed upon would be a default, the New York Times added.

The Wall Street Journal reports that Russia’s default is unusual, as worked hard to stay in good credit standing with foreign countries and has plenty of money to pay off its debts. Russia amassed over $600 billion in foreign-currency reserves as part of its “Fortress Russia” project to protect its economy after the West sanctioned the country after its 2014 annexation of Crimea, but the reserves, frozen under the Western sanctions, are inaccessible for paying the debts.

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For now, the rating will have little impact on investors. However, before the 30-day grace period ends, S&P will withdraw from rating Russian entities per the European Union’s sanctions so no further reporting will be done.

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About the Author

Yaël Bizouati-Kennedy is a full-time financial journalist and has written for several publications, including Dow Jones, The Financial Times Group, Bloomberg and Business Insider. She also worked as a vice president/senior content writer for major NYC-based financial companies, including New York Life and MSCI. Yaël is now freelancing and most recently, she co-authored  the book “Blockchain for Medical Research: Accelerating Trust in Healthcare,” with Dr. Sean Manion. (CRC Press, April 2020) She holds two master’s degrees, including one in Journalism from New York University and one in Russian Studies from Université Toulouse-Jean Jaurès, France.
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