S&P downgrade indicates Russia headed for historic default

BOSTON

The credit ratings agency Standard & Poor’s has downgraded its assessment of Russia’s ability to repay foreign debt, signaling rising prospects that Moscow will soon default on external loans for the first time in more than a century.

S&P Global Ratings issued the downgrade to “selective default”Late Friday, Russia made arrangements to pay foreign bond payments in rubles for Monday’s due in dollars. It stated that Russia was unlikely to be able convert the rubles to dollars within the permitted 30-day grace period.

S&P said in a statement that its decision was based partly on its opinion that sanctions on Russia over its invasion of Ukraine “are likely to be further increased in the coming weeks, hampering Russia’s willingness and technical abilities to honor the terms and conditions of its obligations to foreign debtholders.”

Russia has stated that it is still willing to pay its debts. However the Kremlin warned that it would only do so in rubles, if its overseas accounts are not frozen in foreign currencies.

After evidence of war crimes, Russia was placed under tight sanctions. This week, Russia was prohibited from using any foreign reserves in American banks to pay its debts.

Russia’s finance ministry stated Wednesday that it attempted to make a $649m payment towards two bonds to an unnamed U.S. Bank. However, tightened sanctions prevented the payment being accepted so it paid in rubles.

Western sanctions have severely squeezed Russia’s economy, and S&P and other ratings agencies had already downgraded its debt to “junk”status, deeming a high likelihood of default.

Russia has used capital controls and other severe measures to artificially propup the ruble.

Since the Bolshevik Revolution of 1917, when the Soviet Union was formed, Russia has not defaulted on its foreign debt. Even after the Soviet Union’s collapse, Russia was able, even in the late 90s, to continue paying its foreign debts through international aid. However, Russia did default on its domestic debt.