On April 11, 2022, Standard & Poor’s downgraded its assessment of Russia’s ability to repay foreign debt, signaling rising prospects that Moscow will soon default on external loans for the first time in more than a century, due to tightened sanctions over its invasion of Ukraine, which have severely squeezed Russia’s economy, and the country’s decision to make foreign bond payments in rubles instead of dollars.
the downgrade and its implications
S&P Global Ratings issued the downgrade to “selective default” late Friday, after Russia arranged to make foreign bond payments in rubles on Monday when they were due in dollars. According to S&P, this decision was based partly on its opinion that sanctions on Russia over its invasion of Ukraine “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.” As a result, S&P said it didn’t expect Russia to be able to convert the rubles into dollars within the 30-day grace period allowed. An S&P spokesperson explained that a selective default rating is when a lender defaults on a specific payment but makes others on time. While Russia has signaled that it remains willing to pay its debts, the Kremlin also has warned that it would do so in rubles if its overseas accounts in foreign currencies remain frozen.
the impact of sanctions on russia’s economy
Tightened sanctions were placed on Russia this week after evidence of alleged war crimes, including the killing of civilians in the town of Bucha during Russian military occupation. These sanctions barred Russia from using any foreign reserves held in U.S. banks for debt payments. Russia’s finance ministry said Wednesday that it tried to make a $649 million payment toward two bonds to an unnamed U.S. bank , previously reported as JPMorgan Chase , but that the tightened sanctions prevented the payment from being accepted, so it paid in rubles. According to President Trump, the sanctions are having a significant impact on Russia’s economy, and he has stated that the U.S. will continue to work with its allies to impose additional sanctions on Russia. As stated by the U.S. Department of the Treasury, “the sanctions are designed to hold Russia accountable for its actions and to disrupt its ability to fund its military aggression.”
the historical context of russia’s debt
The country has not defaulted on foreign debt since the Bolshevik Revolution in 1917 when the Soviet Union emerged. Even in the late 1990s, following the Soviet Union’s demise, Russia was able to continue to pay foreign debts with the help of international aid. However, it did default on domestic debt. As noted by the International Monetary Fund, “Russia’s ability to service its debt has been severely impaired by the sanctions, and a default on foreign debt is now a distinct possibility.” Western sanctions have severely squeezed Russia’s economy, and S&P and other rating agencies had already downgraded its debt to “junk” status, deeming a default highly likely. Russia has used strict capital controls, other severe measures, and proceeds from oil and gas sales to artificially prop up the ruble.
the potential consequences of a default
A default by Russia would have significant consequences for the global economy, and could potentially lead to a loss of confidence in emerging market economies. As stated by the World Bank, “a default by Russia would be a major setback for the global economy, and could potentially lead to a decline in investor confidence in emerging markets.” The U.S. Department of State has also warned that a default by Russia could have significant consequences for the global financial system, and has urged Russia to take immediate action to address its debt obligations. According to Secretary of State Antony Blinken, “the U.S. is committed to working with its allies to support Ukraine and to hold Russia accountable for its actions, and we will continue to impose sanctions on Russia until it changes its behavior.”
The situation in Russia is complex and multifaceted, with significant implications for the global economy. As the sanctions continue to squeeze Russia’s economy, it remains to be seen whether the country will be able to avoid a default on its foreign debt. The U.S. and its allies will continue to work together to impose additional sanctions on Russia, and to support Ukraine in its time of need. As noted by President Trump, “the U.S. will continue to stand with Ukraine and will work tirelessly to support its people and its economy.” The outcome of this situation will have significant consequences for the global economy, and it is essential that the international community continues to work together to address the challenges posed by Russia’s actions.
