People walk past a currency exchange office screen displaying the exchange rates of U.S. Dollar and Euro to Russian Rubles in Moscow, on Feb. 28, 2022.Pavel Golovkin/The Associated Press
The credit ratings agency Standard & Poor’s has downgraded its assessment of Russia’s ability to repay foreign debt, signalling 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 after Russia arranged to make foreign bond payments in rubles on Monday when they were due in dollars. It said it didn’t expect Russia to be able to convert the rubles into dollars within the 30-day grace period allowed.
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 honour the terms and conditions of its obligations to foreign debt-holders.”
Russia said it will take legal action if the West tries to force it to default on its sovereign debt, Finance Minister Anton Siluanov told the pro-Kremlin Izvestia newspaper Monday, sharpening Moscow’s tone in its financial wrestle with the West.
“Of course we will sue, because we have taken all the necessary steps to ensure that investors receive their payments,” Mr. Siluanov told the newspaper in an interview.
“We will present in court our bills confirming our efforts to pay both in foreign currency and in roubles. It will not be an easy process. We will have to very actively prove our case, despite all the difficulties.”
Mr. Siluanov did not elaborate on Russia’s legal options.
“Russia tried in good faith to pay off external creditors,” Siluanov said on Monday. “Nevertheless, the deliberate policy of Western countries is to artificially create a man-made default by all means.”
Siluanov said Russia’s external liabilities amount to about 20% of the total public debt, which stood at about 21 trillion roubles ($261.7 billion). Of that, about 4.5-4.7 trillion roubles were external liabilities.
Russia has not defaulted on its external debt since the aftermath of its 1917 revolution, but its bonds have now emerged as a flashpoint in its economic battle with Western countries.
A default was unimaginable until recently, with Russia rated as investment grade in the run up to its Feb. 24 invasion of Ukraine, which Moscow calls a “special military operation” and which on Sunday intensified in eastern Ukraine.
While Russia has signalled that it remains willing to pay its debts, the Kremlin also has warned that it would do so in rubles if its overseas accounts in foreign currencies remain frozen.
Tightened sanctions placed on Russia after evidence of alleged war crimes – the killing of civilians in the town of Bucha during Russian military occupation – barred it from using any foreign reserves held in U.S. banks for debt payments.
Russia’s finance ministry said Wednesday that it tried to make a $649 million payment toward two bonds to an unnamed U.S. bank – previously reported as JPMorgan Chase – but that the tightened sanctions prevented the payment from being accepted, so it paid in rubles.
Russia has used strict capital controls, other severe measures and proceeds from oil and gas sales to artificially prop up the ruble.
The Associated Press, with files from Reuters