Russia has defaulted on its external sovereign bonds for the first time in a century, the culmination of ever-tougher Western sanctions that shut down payment routes to overseas creditors.
For months, Russia had found paths around the penalties imposed after the Kremlin's invasion of Ukraine. But at the end of the day on Sunday, the grace period on about $100 million of interest payments due May 27 expired, a deadline considered an "Event of Default" if missed.
"For all practical purposes, Russia is in default," said Jay S. Auslander, a sovereign debt lawyer at the firm of Wilk Auslander in New York. "The 30-day grace period has expired. Bondholders do not have their money."
Last month, the U.S. Treasury Department ended Russia's ability to pay its billions of dollars in debt back to international investors through American banks. In response, the Russian Finance Ministry said it would pay dollar-denominated debts in rubles and offer "the opportunity for subsequent conversion into the original currency."
Russia has the resources to pay its bills -- and tried to do so -- but was blocked by the sanctions. Those restrictions also mean there's uncertainty about what comes next, and about how investors can go about getting their money.
"With Russia benefiting from the high price of its energy exports, it clearly has both the means and the desire to pay its foreign debt," said Giles Coghlan, chief analyst at HYCM Group. It's a "default in a technical sense, so many investors may be prepared to wait it out."
Given the damage already done to the economy and markets, the default is also mostly symbolic for now, and matters little to Russians dealing with double-digit inflation and the worst economic contraction in years. But still, it's a grim marker in the country's rapid transformation into an economic, financial and political outcast. The nation's eurobonds have traded at distressed levels since the start of March, the central bank's foreign reserves remain frozen, and the biggest banks are severed from the global financial system.
Russia has pushed back against the default designation, saying it has the funds to cover any bills and has been forced into non-payment.
As it tried to twist its way out, it announced last week that it would switch to servicing its $40 billion of outstanding sovereign debt in rubles, criticizing a "force-majeure" situation it said was artificially manufactured by the West.
Russia's last sovereign default occurred in 1998, during the nation's financial collapse and ruble devaluation.
At the time, Russia avoided defaulting on its foreign eurobonds, although President Boris Yeltsin's government reneged on $40 billion of ruble-denominated debt, and also missed payments on dollar notes issued by state-owned Vnesheconombank.
While those bonds were issued after an agreement with the so-called London Club in 1997 to restructure Soviet-era debt held by Western banks, they were technically obligations of Vnesheconombank rather than the Russian Federation, according to a paper published by the International Monetary Fund. In May 1999 the government also defaulted on a Soviet-era dollar bond known as the MinFin III that was domestically issued, but was widely held by foreign investors.
According to Lee Buchheit and Elena Daly, sovereign debt lawyers who provided advice to Russia during its 1990s restructuring, while the country did restructure some of its debt then, that didn't include its eurobonds at the time. "MinFins, while denominated in dollars, were governed by Russian law and therefore could be viewed as internal debt," they said.
The last time Russia fell into direct default to its foreign creditors was more than a century ago, when the Bolsheviks under Vladimir Lenin repudiated the nation's staggering Czarist-era debt load in 1918.
By some measures it approached a trillion dollars in today's money, according to Hassan Malik, senior sovereign analyst at Loomis Sayles & Company LP.
By comparison, foreigners held the equivalent of almost $20 billion of Russia's eurobonds as of the start of April.
A formal default declaration would usually come from ratings firms, but European sanctions led to them withdrawing ratings on Russian entities. According to the bond documents, holders can call one themselves if owners of 25% of the outstanding bonds agree that an "Event of Default" has occurred.
Russia Finance Minister Anton Siluanov dismissed the situation on Thursday as a "farce."
He also said it makes little sense for creditors to seek a declaration of default through the courts because Russia hasn't waived its sovereign immunity, and no foreign court would have jurisdiction.
"If we ultimately get to the point where diplomatic assets are claimed, then this is tantamount to severing diplomatic ties and entering into direct conflict," he said. "And this would put us in a different world with completely different rules. We would have to react differently in this case -- and not through legal channels."
The 30-day grace period was triggered when investors failed to receive coupon payments due on dollar- and euro-denominated bonds on May 27. Bondholders have time to assess the situation: the claims only become void three years on from the payment date, according to the bond documents.
With payments blocked, Vladimir Putin introduced new regulations that say Russia's obligations on foreign-currency bonds are fulfilled once the appropriate amount in rubles has been transferred to the local paying agent.
The Finance Ministry made its latest interest payments, equivalent to about $400 million, under those rules on Thursday and Friday. However, none of the underlying bonds have terms that allow for settlement in the local currency.
So far, it's unclear if investors will use the new tool and whether existing sanctions would even allow them to repatriate the money.
"Is it a justifiable excuse to say: 'Oh well, the sanctions prevented me from making the payments, so it's not my fault'?" said Malik, who is also author of "Bankers and Bolsheviks: International Finance and the Russian Revolution."
"The broader issue is that the sanctions were themselves a response to an action on the part of the sovereign entity," he said, referring to the invasion of Ukraine. "And I think history will judge this in the latter light."
Leaders of the Group of 7 nations meeting in Germany, seeking a new way to throttle Russia's finances while limiting the harm to Western economies, were discussing imposing a ceiling on the price paid for Russian oil. Details of the plan were still being discussed Monday, but the idea is to limit how much Russia can earn from the oil it sells while still keeping markets well supplied.
A price cap is being considered because, despite sanctions imposed by the West after Russia's invasion of Ukraine, Moscow is still earning substantial revenue from oil.
While Russian output has declined around 8% since the war began, prices have risen, generating a steady supply of cash to support the government. Crimping that revenue stream is a goal at the G-7 conference.
The countries likely to support a price cap include the United States, Canada and others that have already banned imports of Russian oil. The European Union, which is phasing out Russian crude, also may be willing to sign on.
But that leaves many other countries that are much more difficult to influence.
"If they continue to just focus on the EU and its allies, then the rest of the world will find a way to take Russian oil," said James Davis, a director at FGE, a consulting firm.
While the details of the plan are still murky, analysts are skeptical that it will have much effect on price, which is more likely to be determined by global supply and demand. Brent crude, for instance, was up about 1.5% Monday to about $115 a barrel as the G-7 discussions proceed.
Information for this article was contributed by Giulia Morpurgo, Libby Cherry of Bloomberg News (TNS), Stanley Reed of The New York Times and Ken Sweet, Kelvin Chan and Stan Choe of The Associated Press.