Russia Falls Victim to the First Fake Default in History

Default or unchildish showdown

When you were a child at school, it probably happened that you could borrow a pen or pencil from a classmate. It might also happen that you then had a fight with that same child, and that child went to the teacher to tell her that you did not want to return the pen or pencil, just out of spite, even though you did want to return it and had it ready to hand over in your pencil case. The teacher may believe one or the other child but be fonder of the one who lent you the pen. She believes that child and therefore punishes you. It sounds absurd, but we have discovered that this can also happen between States, not just between school children.

Indeed, there has been talking of Russia's technical default for days. Thanks to gas and oil revenues, Russia has enough money to pay the holders of its bonds, but being under EU and US sanctions, it is sometimes materially unable to do so. For months, the US has been trying to prevent US banks from crediting the amounts to the creditors' current accounts, thus triggering a technical, artificial default. It is the first time that this has happened in history.

Where does the bankruptcy stem from? Some bondholders in Asia told Reuters that they had not received payment on two bonds due on May 27. Since then, a 30-day grace period has started, during which Moscow should have repaid the debt. The payments in question concern 100 million coupons on two bonds, one denominated in dollars and the other in euros. Russia has struggled for months to repay the debt on 40 billion bonds in circulation since the war began, partly because it no longer has access to foreign currencies and mainly because it has been squeezed out of the banking systems of many countries. Nevertheless, the Russian Ministry of Finance has declared that it did make payments to its onshore National Settlement Depository (NSD) in euros and dollars, fulfilling its obligations.

In other words, it would be a formal default, steered and certified by US rating agencies such as Moody's, which nevertheless appears to be a symbolic event, given that Russia has been unable to access financing and many banks internationally since the war broke out in Ukraine and the consequences for the market have extended to bond yields, even though the country still has plenty of resources. Long story short, the US and EU are preventing Russia from paying, to the detriment of its creditors, so that it can be declared technically bankrupt.

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