LONDON (Reuters) – Moody’s said Russia could be in default because it tried to repay its dollar obligations in rubles, which would be one of the most serious consequences of Moscow’s exclusion to date. of the Western financial system since President Vladimir Putin’s invasion of Ukraine.
If Moscow is declared to be in default, it would mark Russia’s first major default on foreign bonds since the years following the 1917 Bolshevik Revolution, although the Kremlin says the West is forcing a default by imposing crippling sanctions.
Russia made a payment due April 4 on two sovereign bonds – maturing in 2022 and 2042 – in rubles rather than the dollars it was required to pay under the securities.
Russia “can therefore be considered a default under Moody’s definition if it is not corrected by May 4, which is the end of the grace period,” Moody’s said in a statement Thursday.
“The bond contracts do not provide for any reimbursement in a currency other than the dollar.”
Moody’s said that while some Russian Eurobonds issued after 2018 allow payments in rubles under certain conditions, those issued before 2018 – such as those maturing in 2022 and 2042 – do not.
“Moody’s view is that investors did not obtain the contractual foreign currency promise by the payment due date,” Moody’s said.
On Friday, the Russian Finance Ministry did not respond to a request for comment. Finance Minister Anton Siluanov told the Izvestia newspaper earlier this month that if Russia is forced into default, it will take legal action.
Prior to Putin’s Feb. 24 order for what he claims was a special military operation in Ukraine, Russia was classified as an investment. But its sovereign bonds have become a target in what the Kremlin calls US-led economic warfare.
In 1998, Russia defaulted on $40 billion in domestic debt and devalued the ruble under President Boris Yeltsin because it was effectively bankrupt after the Asian debt crisis and falling oil prices rattled confidence in its short-term ruble debt.
In 1918, Bolshevik revolutionaries under Vladimir Lenin repudiated Tsarist debt, shocking global debt markets because Russia then had one of the largest foreign debts in the world.
This time Russia has the money but cannot pay because the reserves – the fourth in the world – that Putin ordered to be built up for such a crisis are frozen by the United States, the European Union, Great Britain Britain and Canada.
As Russia could not and would not borrow at this time, a default would be largely symbolic, marking the tumultuous end of its post-Cold War attempt to fit into the financial architecture of the West.
While Russia has only $40 billion in international bonds outstanding across 15 dollar or euro-denominated issues, its companies have racked up far more foreign debt.
The US Treasury this month suspended Russia’s ability to use foreign exchange reserves held by the Russian central bank with US financial institutions to pay its debt.
The Kremlin says the West has already failed in its obligations to Russia by freezing its reserves and wants a new system to replace the Bretton Woods financial architecture established by Western powers in 1944.
Earlier this month, S&P downgraded Russia’s currency ratings to “selective default” on heightened risks that Moscow will be unable and unwilling to honor its commitments to foreign creditors.
The Russian economy is heading for the worst contraction since the years following the fall of the Soviet Union in 1991, with rampant inflation and capital flight.
(Reporting by Guy Faulconbridge; Editing by Kim Coghill and Frances Kerry)