Russia default on foreign debt for first time since 1917

Russia has defaulted on its foreign debt for the first time since the 1917 Bolshevik Revolution, as the sweeping sanctions over its war in Ukraine effectively cut the country off from the global financial system and made its assets untouchable to many investors.

Russia had a deadline to meet a 30 day grace period on interest payments originally due May 27 due to a deadline of Sunday night. Some bondholders said they had not received the overdue interest on Monday after the end of the key payment deadline.

The Kremlin, which has the money to make payments because of oil and gas revenues, has rejected the claims and accused the West of driving it into an artificial default.

The U.S. Treasury Department canceled Russia's ability to pay billions of debt to international investors through U.S. banks earlier this year. A Treasury Department spokeswoman told Reuters at the time that the action was meant to force Russia to draw down its domestic dollar reserves to curtail spending on its war against Ukraine.

Russia says any default is artificial because it has the money to pay its debts, but sanctions have frozen foreign currency reserves held abroad.

Russia s finance ministry said it made payments to its onshore National Settlement Depository NSD in euros and dollars, and that it had fulfilled its obligations.

In a call with reporters, Kremlin spokeswoman Dmitry Peskov said that payments had been blocked because Western sanctions on Russia was not our problem. But Tim Ash, senior emerging market analysts at BlueBay Asset Management, said that the default is clearly not beyond Russia's control, saying sanctions are preventing it from paying its debts because it invaded Ukraine.

The investors have been expecting Russia to default for months. Insurance contracts that cover Russian debt have priced an 80% likelihood of default for weeks, and rating agencies like Standard Poor s and Moody s have placed the country s debt deep into junk territory.

Russia owes about $40 billion in foreign bonds, about half of it going to foreigners. Russia had around $640 billion in foreign currency and gold reserves, much of which were held overseas and now frozen, before the start of the war.

The Kremlin can borrow rubles at home, where it relies on Russian banks to buy its bonds.

Russia hasn't defaulted on its international debts since the Bolshevik Revolution over a century ago, when the Soviet Union was created and the Russian Empire collapsed. Russia defaulted on its domestic debts in the late 1990s but was able to recover with the help of international aid.

In normal circumstances, bondholders are given new bonds that are less than worth but that at least give them partial compensation.

Deals with Russia's Finance Ministry are hampered by sanctions. No one knows when the war will end or how much debt could wind up being worth.

Jay S. Auslander, a top debt lawyer at the firm Wilk Auslander in New York, told The Associated Press that declaring default and suing might not be the wisest choice. It is not possible to negotiate with Russia, and there are so many unknowns, so creditors may decide to hang tight for now.