According to Moody's credit agency and the White House, the Russian Federation entered a sovereign default on Sunday after a 30-day grace period for missed payments on two international bonds expired.
The default is the result of stiff western sanctions resulting from Russia's continued invasion of Ukraine. In April, the White House moved to sever Russia's access to its U.S.-based cash reserves, while Euroclear blocked the Russian government from paying its bonds when they came due in May.
As historic as Russia's default may be, there is quite a bit of skepticism from experts that it will make much of a difference, as well as debate about whether Russia's missed payments qualify as a default.
Is it a Default or Not?
As one might expect, the Kremlin has fought back against default allegations. In a press call on Monday, Kremlin spokesperson Dmitry Peskov denied that Russia had entered a default, stating that the cash for the payments was sent, but western governments were blocking it. Because the blockage was beyond Russia's control, Peskov argued, the situation can not be called a "default."
Russia's declaration won't carry much weight, but Peskov might not be wrong.
A sovereign default is typically called by credit rating agencies, though most have stopped rating Russia amid the invasion of Ukraine. Moody's is the only agency to have called a default, issuing a report to clients on Monday.
However, the terms of the bonds also allow debt holders to call a default if the owners of at least one-quarter of outstanding bonds agree a default has occurred.
While Moody's has called a default, it may be some time before such a call can be "official" due to the gray area created by the lack of credit agencies rating Russia. If bondholders opt to call a default, the next step would be a protracted court battle, further muddying the waters of Russia's debt into the near future.
What Lies Ahead for Russia's Economic Future?
A sovereign default is a massive stain on any country's economy and can severely limit access to foreign investment. However, the effects of default are proportional to a country's ties to international finance, and Russia isn't heavily intertwined with foreign capital.
Possessing adequate income from its energy exports and domestic income, Russia hasn't needed to issue many bonds in the nearly 30 years since the fall of the USSR. Even if other agencies or bondholders declare a default, Russia's lack of demand for foreign capital gives it substantial insulation against the fallout of a default.
However, the push by Western nations to diversify away from Russian energy imports means that the country's insulation has a lifespan. While Russia may be benefitting in the short term from high gas prices, its aggression in Ukraine and global markets against its own clients will severely impact the country's balance sheet in the coming years.
Additionally, Russian stocks of vital foreign goods like semiconductors are running low, and the country lacks the domestic industries necessary to fill the gap. Starting such enterprises has been difficult for Russian entrepreneurs in better economic conditions, meaning that any attempts in the current sanction-limited Russian economy are likely doomed.
