over 1 year ago • 2 mins
Russia had until Sunday to pay the holders of two foreign-currency government bonds. But it didn’t, saying that Western sanctions – which have cut its access to the global financial system – are preventing it from doing so. That effectively means the country has defaulted on its debt for the first time since 1998.
This “effectively” is important here. It’s typically the job of credit agencies to officially declare a default, and they’re not currently operating in Russia (sanctions again). That also means it’s up to the bondholders themselves to bring legal action against the country, which could get messy. After all, very few jurisdictions are likely to have much say in proceedings. And even if a legal decision is made, it’s not going to be easy to enforce it, given that central banks and diplomatic assets enjoy a special level of protection. Put simply, expect a long, complicated process.
Russia's missed payment is unlikely to have direct implications for financial markets or your portfolio: the country’s bonds were already down about 80% since February before the default. But this whole saga is going to have bigger implications than you might expect. For one thing, the default is likely to add fuel to the fire in the ongoing conflict in Ukraine. Putin, after all, isn’t going to want to look financially weakened. For another, it probably means countries and companies are less likely to invest in Russia for years to come. It could even make it harder to get financing from its key remaining ally, China, which might not want to risk being involved in a potential debt restructuring.
So it’s true that there isn’t going to be much hand-wringing around this default among investors. But keep in mind that investing is all about anticipating second or third-order consequences, and the default is going to be responsible for a series of them – not just on the bond market, but more broadly. So you’re better off avoiding any assets linked to Russia for now, and instead just closely monitor what happens next.
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