Russia faces historic default as sanctions bite

Russia is poised to default on its debts for the first time since the 1990s, it was reported on Wednesday, as economic and financial sanctions began to bite.

Interest payments of $117m on two dollar-denominated sovereign bonds that were sold in 2013 are due on Wednesday.

They are the first coupon payments to fall due since Russia invaded Ukraine and the US, UK and European Union responded by imposing economic and financial sanctions on Moscow. Sanctions include barring Russian institutions from accessing either dollar or euro assets that are held abroad.

Moscow has already hinted that it may pay creditors in "unfriendly" countries in roubles, and Fitch Ratings said that a "forced redenomination” of payment obligations such as this would indicate that “a default or default-like process has begun".

The credit rating agency downgraded Russia earlier this month to ‘C’, reflecting its view that a sovereign debt default was imminent. The only Fitch ratings weaker than C are ‘D’ and ‘RD’, which are given when an issuer is in default.

Should Russia default, it will be its first since 1998 - when it triggered a financial crisis - and the first on its foreign-currency debt since the 1917 revolution, when the new Bolshevik government refused to pay the last tsar’s debts.

Victoria Scholar, head of investment at Interactive Investor, said: "The onset of war, Western sanctions, the exodus of international conglomerates and freefalling investor confidence have led to Russia’s downfall with its currency, financial system and the wider economy in a state of ruin.

"Although Russia technically has a 30-day grace period before an official default, a full-blow collapse is almost inevitable."

TD Securities said markets would be watching the situation closely. "While payments totalling $117m may not occur immediately - a technical default would still leave the issuer with a 30-day grace period to rectify - the government has anticipated that they mean to pay in roubles, in substitution of dollars," it noted.

"Also, it is not clear whether money will be made available on local Russian accounts, or paid directly to foreign custodians’ accounts in exemption from a ban on rouble payments aboard. A missed payment and risk of a fully-fledged Russia default would likely worsen market sentiment, and possible spill over into other markets."