Russia faces defaulting on foreign debts within weeks

Russia is poised to default on its foreign debts within weeks as new US sanctions threaten to prevent it from paying bond holders.

Moscow could find itself on track for a failed payment by the end of the month, despite the Kremlin blinking and raiding its limited reserves to pay off bondholders earlier this week.

Russia is due to make coupon payments on several bonds on May 27, but an exemption granted by the US Treasury allowing payments to flow to Western investors will lapse two days before.

That means Russia could face the prospect of an automatic default, even if it tries to once again tap its foreign exchange warchest, the majority of which has been frozen by sanctions, in order to make the payment.

Andy Sparks from MSCi, a US data company, said failure to make the payment “could trigger a default event”.

“Alternatively, extending the exemption could provide additional payments to bondholders as long as the Russian government signals a willingness and ability to continue making payments,” he said.

The West has blocked Moscow from accessing around half of the $640bn in foreign exchange reserves held in foreign accounts as part of extensive sanctions aimed at bringing Vladimir Putin’s ‘Fortress Russia’ to its knees.

That led Moscow to tap the dwindling pile of dollars it holds domestically, making the cost of imports more expensive and potentially fuelling inflation in the country, which is already at multi-decade highs.

Russia was forced into a U-turn last week after a month-long standoff over $650m in Eurobond coupon payments that became due on April 4.

It first attempted to make the payments using its frozen overseas reserves, and then tried to pay creditors with roubles, a move which was rejected. Last Friday, it announced the payments were being made from domestic reserves, with the money arriving with Western investors on Tuesday.

Timothy Ash, a strategist at BlueBay Asset Management, said: “If Russia had gone into default even friendly countries, such as China, likely would have been reluctant to lend to Russia, unless at very high rates of interest.

“Default would in effect be a huge long term negative for Russia – keeping borrowing costs high, curbing investment and growth, and lowering living standards.”