Russia set for ‘monumental’ debt default for first time since 1918

Russia could today default on its international debts for the first time since the Bolshevik revolution.

Moscow appears unable to pay £90million of debt interest owed to foreign investors holding two of the country’s bonds.

A default would underline Russia’s status as an international pariah and cause further ructions on markets still reeling from the invasion of Ukraine.

Red alert: Anton Siluanov, Russia’s finance minister, with President Vladimir Putin in Moscow

Some experts fear that a default could be the first of many. Jonathan Prin, a portfolio manager at Greylock Capital, said it would be a ‘monumental’ event on global debt markets.

Professor Christopher Gerry, a Russian political economy expert at the University of Oxford, added: ‘There will be further panic and exit from the Russian market, both domestically and internationally. Pretty soon, a domino effect sets in, exacerbating what is already a collapse of the economy.

‘Job losses, shortages of products to buy, breakdown of supply chains, shortages of critical medicines.’

But Kristalina Georgieva, managing director at the International Monetary Fund, said: ‘When you look at the total exposure of banks to Russia, it is about £92billion. Not negligent, but definitely not systemically relevant.’

The Kremlin insists it can pay in roubles. But the money is owed in US dollars – leaving Russia on the verge of defaulting on its international debts for the first time since 1918. It last defaulted on domestic debts in 1998.

A large amount of Moscow’s debt is financed by bonds issued in US dollars and the country is finding it harder to access its foreign currency reserves because of sanctions.

Anton Siluanov, Russian finance minister, said: ‘If we see complications with executing the order then we will prepare a relevant transfer order in the rouble equivalent.

‘From Russia’s point of view, we are fulfilling our obligations.’

But the West disagrees and JP Morgan says the two bonds do not contain clauses allowing repayment in roubles.

A missed debt payment would trigger the start of a 30-day grace period for Russia to meet its obligation to creditors. If missed, the default would be viewed across the globe as a sign of weakness.

And if the war continues it could be the first of many. Chris Beauchamp, analyst at IG Group, said: ‘This could be another massive embarrassment for Putin and a sign of what is to come.

‘It could be the first of many defaults and the start of much financial distress.’

It would be the first time the country has defaulted on its foreign debt since 1918 when Lenin refused to pay as the Bolshevik regime would not recognise Tsarist-era debts following the Russian Revolution.

That sent shock waves around the globe. Britain said the Bolsheviks were undermining ‘the very foundations of international law’. 

The debts were never repaid. Russia also defaulted on its domestic debts in 1998, creating carnage. It led to the collapse of a huge US hedge fund called Long-Term Capital Management, which had to be bailed out to prevent a worldwide meltdown.

Fears are that missed Russian payments could trigger a similar outcome. ‘This will be a monumental default,’ said Prin. ‘It’s probably the most broadly felt emerging-market default since Russia itself in 1998.’

But analyst Nikolaos Panigirtzoglou of JP Morgan said foreign investors and banks have already cut their exposure to Russia since the 2014 annexation of Crimea.

Bank for International Settlements data shows the total exposure of foreign banks to Russian debt is around $105billion (£80billion).

This post first appeared on Dailymail.co.uk