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S&P Downgrade Points to Historic Default for Russian Economy

S&P Downgrade Points to Historic Default for Russian Economy

The credit rating agency Standard & Poor’s has downgraded its assessment of Russia’s ability to repay foreign debt, an indication that Moscow will soon default on external loans for the first time in more than a century. S&P Global Ratings issued the downgrade to “selective default” late Friday after Russia arranged to make foreign bond payments in rubles on Monday when they were due in American dollars. It said it didn’t expect Russia to be able to convert the rubles into dollars within the 30-day grace period allowed. A selective default rating is when a lender defaults on a specific payment but makes others on time. While Russia has signaled that it remains willing to pay its debts, the Kremlin also has warned that it would do so in rubles if its overseas accounts in foreign currencies remain frozen.

Russia hasn’t defaulted on any foreign debts since the Bolshevik Revolution in 1917 when the Soviet Union emerged. Even in the late 1990s, following the Soviet Union’s demise, Russia was able to continue to pay foreign debts with the help of international aid. It did default on domestic debt, however.

Western sanctions have severely impacted the Russian economy, as S&P and other ratings agencies had already downgraded its debt to “junk” status, deeming a default highly likely. S&P said in a statement that its decision was based partly on its opinion that sanctions on Russia over its invasion of Ukraine “are likely to be further increased in the coming weeks, hampering Russia’s willingness and technical abilities to honor the terms and conditions of its obligations to foreign debtholders.”

Russia’s finance ministry said Wednesday that it tried to make a $649 million payment toward two bonds to an unnamed U.S. bank — previously reported as JPMorgan Chase — but that the tightened sanctions prevented the payment from being accepted, so it paid in rubles.

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