Russia is on the verge of a large-scale default, after it failed to pay its dollar debt this week, a report in the French press said, prompting the rating agency "S&P", on Saturday, to announce a "selective" default.

Payment of money .. how to be?

When a country or company repays a foreign currency loan or pays interest associated with the loan, the amount is transferred to an account opened by a national bank in a correspondent bank abroad.

The latter must check whether the payment continues or not.

After the ability to comply is analyzed, the funds are deposited into a sub-account controlled by a paying agent bank, before payments are made to bondholders.

Why this caution?

US authorities fined Societe Generale $1.34 billion in November 2018 for bypassing a Washington ban.

Prior to that, BNP Paribas admitted in 2014 to violating the US embargo on Cuba, Iran and Sudan, and paid $8.9 billion to escape prosecution in the United States.

What does a state default mean?

  • A country is considered in default when it is unable to meet its financial obligations to its creditors, who may be countries, financial institutions (the International Monetary Fund, the World Bank…) or investors in financial markets.

  • Partial default is when the state does not pay part of its obligations.

  • The government itself can declare that it is in default by declaring that it will not pay its debts, as Russia did in 1998 on its internal debt.

    An announcement may also come from a rating agency after a grace period.

  • A private creditor may declare default, publicly revealing that a country has stopped paying.

  • The announcement may come via the US agency ISDA (International Swaps and Derivatives Association), which governs credit swaps, a type of insurance against default.

Russia on the brink of default?

For several weeks, Russia avoided the risk of default, as the US Treasury allowed the use of foreign currencies held by Moscow abroad to pay off foreign debts.

And last March, Russia paid parts of the interest in this way, showing its willingness and ability to pay.

But since Monday, the United States no longer allows Russia to repay its debts with dollars held in American banks.

As a result, JPMorgan, a correspondent bank, blocked the payment.

Then, on Wednesday, the Russian Ministry of Finance announced that it had paid in rubles nearly $650 million due on April 4.

Following the decision, financial rating agency S&P Global Ratings on Saturday lowered Russia's rating for foreign currency payments (not ruble payments) to "selective default", the last stage before a public default.

This means that S&P currently believes that Russia will be able to pay future maturities.


And a specialist in banking and state stumbling, Salim Souissi, considered that "the Russian state, like many Russian companies, is being pushed into a technical stumble, in an unprecedented event."

Financial rating agency S&P Global Ratings on Saturday lowered Russia's rating for foreign currency payments, rather than ruble payments, to "selective default", the last stage before a general default.

“Payment must be made in favorable conditions at least as much as was originally agreed,” he said, but “in the case of payment in rubles, when the binding contract provides for payment only in dollars, this can be considered as a default.”

Who acts as a referee?

Ratings agencies Fitch and Moody's have stopped evaluating Russian state and corporate debt as part of the sanctions imposed on Russia.

S&P Global Ratings was supposed to stop ratings by April 15, but finally announced Saturday that it would stop doing so.

Possible trials?

Soissy emphasized that, in theory, creditors could "take legal action against the Russian state to be compensated, even if their margin of action is very limited."

Russia can also challenge any default in the courts on the grounds that it has been prevented from meeting its foreign debt due to financial sanctions.