Russian government driven to technical insolvency

The 30-day grace period for about 100 million dollars in Russian foreign debt that came due at the end of May was reached on June 27 without Russia making its payments. The international credit rating agency Moody’s declared the Russian government in default on its foreign debt. Russia has resources to pay its debts, but lacks the ability to use those resources. While soaring oil & gas prices have boosted Russia’s foreign currency export earnings in recent months, the sanctions imposed on Russia for its war on Ukraine have significantly limited its ability to make international payments and effectively blocked Russia from paying its foreign debts.

The immediate impacts from payment defaults are limited. War and Western sanctions had already largely barred Russia from international financial markets. While Russia does not necessarily need additional financing at the moment due to large inflows of export earnings and sovereign savings, technical insolvency hurts the access of the Russian government and Russian corporations to international financing in the longer term, thereby raising borrowing costs when Russia returns to international financial markets.

The declaration of insolvency is also symbolically touchy for Russia. The Russian government attempted to circumvent the default by various means, e.g. requesting that creditors accept payment in rubles even if it did not conform to the lending terms. Government default can remind ordinary Russians of the severe financial crisis in 1998.