By not allowing Russia to pay its debt, the West adds further financial costs to Putin's regime as a punishment for its invasion of Ukraine. This is consistent with economic sanctions against Russia and military and financial support of Ukraine. Specifically, the default serves to:
- Make Russia’s access to foreign financing limited for decades.
- Make Russia face higher borrowing costs for decades.
- Downgrade Russia's credit rating, if the credit agencies rate it in the future.
- Open the possibility of litigation against Russia by the creditors.
- Crash other Russian bonds.
- Cause other serious negative consequences for Russia: lower investment, lower growth, lower living standards, capital and human flight (brain drain), and a vicious circle of decline for the Russian economy.
A formal default would be largely symbolic given Russia cannot borrow internationally at the moment and doesn't need to thanks to plentiful oil and gas export revenues. But the stigma would probably raise its borrowing costs in future.
Credit ratings agencies usually formally downgrade a country's credit rating to reflect default, but this does not apply in case of Russia as most agencies no longer rate the country.
Russia pushed into historic default by sanctions. By Karin Strohecker, Andrea Shalal and Emily Chan. June 27, 2022: https://www.reuters.com/markets/europe/russia-slides-towards-default-payment-deadline-expires-2022-06-26/
Adam Solowsky, partner in the financial industry group at international law firm Reed Smith, told CNBC on Monday [...] “The existence of a Russian default may need to be resolved in litigation, but given the current state of the sanctions, a judgment in favor of investors may still not result in a payment any time soon,” [...]
Timothy Ash, senior emerging market sovereign strategist at Bluebay Asset Management, said while the default might not have much immediate market impact, Russian sovereign longer maturity eurobonds that were trading at 130 cents before the invasion have already crashed to between 20 and 30 cents, and are now trading at default levels.
“But this default is important as it will impact on Russia’s ratings, market access and financing costs for years to come. And important herein, given the U.S. Treasury forced Russia into default, Russia will only be able to come out of default when the U.S. Treasury gives bond holders the green light to negotiate terms with Russia’s foreign creditors.”
Ash suggested this process could take years or decades, even in the event of a cease-fire that falls short of a full peace agreement, meaning Russia’s access to foreign financing will remain limited and it will face higher borrowing costs for a long time to come.
He argued that Russia’s alternative sources of foreign financing beyond the West, such as Chinese banks, would also be reluctant to look beyond the default headlines.
“If they are prepared to run the secondary sanctions risks — which so far they have not — and still lend to Russia, they will add a huge risk premium to lending rates for the prospect of somehow being dragged into future debt restructuring talks,” Ash said.
“It just makes lending to Russia that much more difficult, so people will avoid it. And that means lower investment, lower growth, lower living standards, capital and human flight (brain drain), and a vicious circle of decline for the Russian economy.”
Russia slides into historic debt default as payment period expires. By Elliot Smith. Jun 27, 2022: https://www.cnbc.com/2022/06/27/russia-on-the-brink-of-historic-debt-default-as-payment-period-expires.html