Russia's US$117mln interest payment on its dollar-denominated bonds due today raised fears that it could lead to a rare and substantial sovereign default next month o$150bn.
This would not be the first default by Russa in living memory, with the country having last defaulted on domestic debt in 1998, but this would be the first default on its foreign currency debts since the Bolshevik revolution in 1918.
With many billions of currency in its coffers, Moscow easily has the means to pay back the interest, but its access to US dollars is being affected its foreign exchange reserves being frozen under international sanctions.
The government warned that payments to creditors from ‘hostile’ countries will be made in rubles, though analysts said that was likely to be a breach of the contract and tantamount to default, after a 30 day grace period.
"A default could be a blow to the banking stocks due to their exposure to the Russian debt, because the latter was investment grade just a couple of weeks ago," said analyst Ipek Ozkardeskaya at Swissquote.
"The good news is, though an eventual Russian default will give a shake to the financial markets, it is not a systemic threat to the global economy. Phew."
A default won’t affect the Russian government’s ability to finance itself and seems unlikely that there will be significant spillovers elsewhere, agreed William Jackson, emerging markets economist at Capital Economics.
For foreign investors, he said a default is "largely priced in", with Russia’s sovereign dollar bonds already trading at 20 cents on the dollar, with media reports suggesting that creditors have already marked down their holdings.
Moreover, the overall size of Russian foreign currency sovereign debt held by non-residents is relatively small, at around $20bn.
"Perhaps the bigger risk is that it may be a prelude to defaults by Russian corporates, whose external debts are more than four times larger than those of the sovereign," said Jackson.