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As Payment Deadline Approaches, Russia Enters Default Zone

Russia seemed to be on the verge of its first sovereign default in decades, with some bondholders reporting that they had not paid overdue interest on Monday, despite the fact that a critical payment deadline had passed the day before.

Since its invasion of Ukraine on February 24, Russia has failed to meet payments on $40 billion in outstanding bonds, as broad sanctions have virtually shut the nation off from the global financial system and left its assets untouchable to many investors.

The Kremlin has consistently stated that there is no need for Russia to fail, but it is unable to pay bondholders due to sanctions, accusing the West of attempting to force it into a fake default.

Russia’s efforts to avoid what would be the country’s first major default on international bonds since the Bolshevik revolution more than a century ago hit an impasse in late May, when the United States Treasury Department’s Office of Foreign Assets Control (OFAC) effectively barred Moscow from making payments.

“We’ve assumed since March that a Russian default was very certainly imminent, and the question was simply when,” said Dennis Hranitzky, head of sovereign litigation at law firm Quinn Emanuel. “OFAC has interfered to answer that question for us, and the default is now upon us.”

While a legal default would be primarily symbolic given Russia’s inability to borrow abroad at the time and lack of necessity due to abundant oil and gas export profits, the stigma would almost certainly hike its borrowing prices in the future.

The payments in dispute are $100 million in interest on two bonds, one in US dollars and the other in euros, which Russia was supposed to make on May 27. The payments had a 30-day grace period that ended on Sunday.

Russia’s finance ministry said it paid payments in euros and dollars to its onshore National Settlement Depository (NSD), and that it had met its responsibilities.

According to reports, several Taiwanese bondholders did not receive payments on Monday.

For many bondholders, failure to get money owing into their accounts on schedule constitutes a default.

With no specific time indicated in the prospectus, attorneys believe Russia may have until the end of the next business day to pay bondholders.