Russia could default on its foreign debt for the first time in a century

A MARTINEZ, HOST:

Russia could default on its foreign debt for the first time in a century. It's a consequence of economic sanctions imposed after the invasion of Ukraine. Wailin Wong and Adrian Ma from NPR's daily economics podcast, The Indicator from Planet Money, explain Russia and its creditors may be headed for a long legal showdown.

WAILIN WONG, BYLINE: Elina Ribakova is deputy chief economist at the International Institute of Finance.

ELINA RIBAKOVA: Russia's outstanding debt is about 17% of GDP. Seventeen percent of GDP is almost ridiculously low number.

ADRIAN MA, BYLINE: And just for comparison, the U.S., France, Canada - their ratios of government debt to GDP are over 100%. Elina says Russia wanted to insulate itself from global capital markets, so it kept borrowing to a minimum.

WONG: But Russia did sell government bonds to raise money, and some of that was foreign debt - bonds issued in dollars or euros, typically held by institutional investors around the world who collect regularly scheduled interest payments.

MA: Even with sanctions freezing Russian accounts at international banks last month, Elina says the U.S. Treasury made an exception. They let Russia's interest payments to bondholders go through. So the foreign bondholders - they got their money.

WONG: But then on April 4, when Russia had $650 million in bond payments coming due...

RIBAKOVA: Russian authorities tried to do the same in terms of paying from the existing frozen accounts. Then that's where the U.S. Treasury said, no, you cannot do that. Then the Russian authorities said, look, if we cannot do this, we're going to try to pay you in rubles.

MA: This was a problem because the contracts for the bonds say the payments have to be made in U.S. dollars. So for credit-rating agencies like Standard & Poor's, those rubles that the Russian government had sitting in local accounts - they don't count as payment.

WONG: This back-and-forth took a couple of days to play out, but when the dust settled, S&P declared Russia to be in selective default. That means they're in default on just those bonds.

MA: Russia right now is in this 30-day grace period to make those payments in dollars, and that period ends in early May. That means Russia would officially be in default when the grace period ends.

WONG: The fallout from a default would be relatively contained, given how small Russia's foreign debt load is. But it would cement Russia's status as an economic pariah, cut it off from global financial markets and make the cost of future borrowing really high.

MA: Now, normally, when a borrower defaults on their obligations, it is because they don't have the money. But that's not exactly the case here.

RIBAKOVA: This is unwillingness to pay, rather than inability to pay. They're currently generating every day significant inflows - so foreign exchange from their large sales of energy. So Russia does have the money. The issue of unwillingness is sort of tit for tat. You took our money with sanctions, and therefore, look, we cannot do anything. We're going to pay you in rubles.

WONG: Russia's finance minister told local media the country would take legal action if Western countries forced it into default. He didn't really offer more details, but sovereign debt experts are bracing themselves for a long, messy showdown in the courts. The last time the country defaulted on its foreign debt was after the Bolshevik Revolution. In 1918, the new Russian government under Vladimir Lenin repudiated the debt that had been borrowed by the czar. Most of those foreign creditors are still waiting to get their money back.

MA: Adrian Ma.

WONG: Wailin Wong, NPR News. Transcript provided by NPR, Copyright NPR.