Russia Faces Imminent Sovereign Default for the First Time in 104 Years

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[Asia Economy Reporter Ki-min Lee] Russia is on the verge of its first international debt default in 104 years.

The Wall Street Journal (WSJ) and Bloomberg reported on the 20th (local time) that the Credit Default Swap (CDS) market supervisory body has determined that Russia's payment of interest in rubles on two dollar-denominated government bonds earlier this month constitutes a failure by the debtor to fulfill its obligations.

Russia, unable to use American banks due to sanctions imposed by the U.S. government, paid interest in rubles to dollar bondholders on the 6th.

The Russian Ministry of Finance stated that it attempted to transfer the interest in dollars through JP Morgan Chase, but JP Morgan refused the payment of $649 million (approximately 800 billion KRW) because it did not receive approval from the U.S. Treasury Department.

In response, the Credit Derivatives Determinations Committee (CDDC), which oversees the CDS market, decided that Russia failed to meet its debt repayment obligations because investors did not receive the payment in dollars.

Earlier, on the 14th, the international credit rating agency Moody's also warned that Russia's payment of interest on two dollar bonds in rubles could constitute a default, as there is no clause allowing payment in a currency other than dollars.

If Russia fails to pay the interest in dollars by the deadline of the 4th of next month, when the 30-day grace period ends, it will be officially declared in default. This would be Russia's first external debt default since 1918, the year following the Bolshevik Revolution.

CDS are derivative products that act like insurance compensating for losses if bonds default; premiums rise as default risk increases.

Therefore, if Russia fails to pay in dollars by the 4th of next month, it will be considered a credit event, and CDS investors will receive compensation for their losses.

According to JP Morgan, CDS related to the Russian government amount to about $4.5 billion (approximately 5.6 trillion KRW). Since Russia invaded Ukraine and the West imposed sanctions on Russia's financial sector, Russian government bond CDS premiums have surged vertically.

According to ICE Data Services' data on Russian government bond CDS premiums, the probability of default reflected in the prices is 93%. This is a significant increase from 5% in early February and 40% in early March.

This content was produced with the assistance of AI translation services.