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 downgraded Russia to “selective default” on Friday after Russia made arrangements to pay foreign bond payments in rubles, despite the fact that 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 honor the terms and conditions of its obligations to foreign debtholders.”
An S&P spokesperson said a selective default rating is when a lender defaults on a specific payment but makes others on time. While Russia has indicated that it is willing to pay its debts, it has also warned that the Kremlin would do so in rubles if it has foreign currency accounts that are frozen.
Tightened sanctions placed on Russia this week 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. The Western sanctions have severely slowed Russia’s economy. S&P and other rating agencies had already downgraded Russia’s debt to “junk”, deeming a default highly probable. Russia has used capital controls, other severe measures, and proceeds from oil-and gas sales to artificially support the ruble.
The country has not defaulted on foreign debt since the Bolshevik Revolution in 1917, when the Soviet Union emerged. Even in the late 1990s, following the Soviet Union’s demise, Russia was able to continue to pay foreign debts with the help of international aid. However, it did default on its domestic debt.
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