On April 15, 2022, the Russian Federation attempted to service its U.S. Dollar debt by paying the interest payment in Russian Rubles. According to Moody’s definition, the use of Rubles represents a change in payment terms relative to the original bond contracts and, therefore may be considered in default if not cured by May 4th, which is the end of the grace period.
This will not be the first time that Russia has defaulted on its debt. The Treasury Bill shown above was a three-month instrument that was defaulted on in 1917 after the Bolshevik Revolution. The debt was issued after the abdication of the Tzar in February 1917 by the internationally recognized Russian Provisional Government. However, the Russian Provisional Government was overthrown by the Bolsheviks on October 24, 1917, barely a month after this treasury bill was issued. The new communist government failed to repay the principal as it came due in December 1917. Then, in February 1918 all debts incurred by the Tzarist regime, and the Russian Provisional Government were cancelled. In addition to reneging on their foreign debt, the Russian Federation also nationalised all foreign owned assets located in Russia.
These events shook up the global capital markets and, no attempt to repay the loans was made until the breakup of the Soviet Union in 1996.
It is likely that foreign owners of Russian debt will suffer the same fate as their forebearers in 1917. According to the Bank of Russia’s estimate, external debt of the Russian Federation as of March 31, 2022, totalled $453.5 billion. This includes both public and private sector debt. When a country defaults on its debt, investors often worry about contagion to other countries. This seems unlikely to happen, and the amounts involved are not large enough to create a global debt crisis. So, if Russia does allow the grace period to pass, resulting in an effective default on its debt, it will be a side bar in the history of its invasion of Ukraine and Russian debt certificates will have more value as wall decorations than as a security.
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