Russia 'defaults' on foreign debt for first time in over a century

Russia looks set for its first sovereign default in decades as some bondholders have said they have not received overdue interest following the expiry of a key payment deadline a day earlier.

The payments, $100 million in interest on the two bonds, had a grace period of 30 days, which expired on Sunday.

"There are no grounds to call this situation a default," Kremlin spokesman Dmitry Peskov insisted on Monday, calling claims of a default "absolutely wrong". Finance Minister Anton Siluanov has also dismissed the situation as a "farce".

The Kremlin says it is unable to send money to bondholders because of sanctions, accusing the West of trying to drive it into an "artificial default".

Russia's finance ministry said it made the payments to its onshore National Settlement Depository (NSD) in euros and dollars, adding it has fulfilled obligations.

But in early June the European Union imposed sanctions on the NSD, Russia's appointed agent for its Eurobonds.

Moscow has scrambled in recent days to find ways of dealing with upcoming payments and avoid what would be its first major default on international bonds since the Bolshevik revolution more than a century ago.

President Vladimir Putin signed a decree last Wednesday to launch temporary procedures and give the government 10 days to choose banks to handle payments under a new scheme, suggesting Russia will consider its debt obligations fulfilled when it pays bondholders in roubles.

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Taiwan holders haven’t received payments

While a formal default would be largely symbolic given Russia cannot borrow internationally at the moment and doesn't need to thanks to plentiful oil and gas export revenues, the stigma would probably raise its borrowing costs in the future.

Rodrigo Olivares-Caminal, chair in banking and finance law at Queen Mary University in London, said clarity was needed on what constituted a discharge for Russia on its obligation, or the difference between receiving and recovering payments.

"Russia saying it's complying with obligations under the terms of the bond is not the whole story," Zia Ullah, partner and head of corporate crime and investigations at law firm Eversheds Sutherland said.

"If you as an investor are not satisfied, for instance, if you know the money is stuck in an escrow account, which effectively would be the practical impact of what Russia is saying, the answer would be, until you discharge the obligation, you have not satisfied the conditions of the bond."

Some Taiwanese holders of the bonds reportedly had not received payments on Monday. For many bondholders, not receiving the money owed in time into their accounts constitutes a default.

With no exact deadline specified in the prospectus, lawyers say Russia might have until the end of the following business day to pay the bondholders.

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