Russia said Monday that two of its debt payments had been blocked from reaching its creditors, bringing the country one step closer to its first foreign default in a century due to sanctions over the Ukrainian offensive.
The announcement came on the 124th day of Russia’s military intervention in Ukraine, as Western sanctions have so far failed to force the Kremlin to change course.
Western economic penalties have largely cut the country off from the international financial system, making it difficult for Moscow to service its debt.
Russian authorities insist they have the funds to service the country’s debt and accuse the West of artificially seeking to drive Moscow into default.
“There is no reason to call this situation a default,” Kremlin spokesman Dmitry Peskov told reporters after a key payment deadline expired on Sunday.
“These claims about default are absolutely false,” he said, adding that Russia settled the debt in May.
A 30-day grace period for paying $100 million in interest expired Sunday night, most of which had to be paid in foreign currency.
In a statement, Russia’s finance ministry said two of its debt payments were not transferred to creditors, but denied the event amounted to a default.
International settlement and clearing systems “received all funds in advance”, but payments were not transferred to final recipients due to “third-party actions”, the ministry said.
“The non-receipt of money by investors is not due to the lack of payment, but to the actions of third parties,” the ministry added, saying such an event did not constitute a default.
“The actions of foreign financial intermediaries are beyond the control of the Russian Finance Ministry,” the statement said.
Finance Minister Anton Siluanov previously called the situation a “farce”.
While some experts dismiss the event as a technical fault, others say it will have far-reaching consequences.
“This default is significant because it will impact Russia’s ratings, market access and funding costs for years to come,” said Timothy Ash, emerging markets strategist at BlueBay Asset Management.
“And that means lower investment, lower growth, lower living standards, flight of capital and people (brain drain) and a vicious circle of decline for the Russian economy. »
Russia lost the last way to repay its foreign currency loans after the United States last month removed an exemption that allowed American investors to receive payments from Moscow.
In response, Russia said it would pay in rubles that could be converted into foreign currencies, using a Russian financial institution as the paying agent, even though the bonds do not allow local currency payments.
Russia has accused the West of seeking to push it into an “artificial default” through unprecedented sanctions imposed after President Vladimir Putin sent troops to Ukraine on February 24.
The measures included freezing the Russian government’s stockpile of $300 billion in foreign currency reserves held abroad, making it harder for Moscow to settle its external debts.
The country last defaulted on its foreign debt in 1918, when the leader of the Bolshevik Revolution Vladimir Lenin refused to acknowledge the massive debts of the deposed tsar’s regime.
Russia defaulted on its domestic debt in 1998 when, due to a fall in commodity prices, it faced a financial crisis that prevented it from supporting the ruble and repaying debts accumulated during the first war in Chechnya.
The International Monetary Fund’s number two, Gita Gopinath, said in March that a Russian default would have a “limited” impact on the global financial system.