Sopuruchi Onwuka

International credit rating agency, Standard & Poor’s (S&P) has downgraded Russia’s foreign currency rating to “selective default” signaling increased risks that that the country would likely default on foreign debt for the first time in more than a century.

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The Oracle Today reports the new rating indicates that doing business with Russian is now fraught with credit risks which follow the country’s exclusion from international trade and payment systems that transact in foreign exchange.

Russia which accumulated huge basket of economic and trade sanctions from western economic giants is severed from international financial transactions and cannot currently reach its half trillion dollar reserves stashed in the United States. The country’s trading partners are also unable to raise bank instruments to execute dollar payments.

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.

International rating agency, Standard and Poor’s (S&P) declared weekend that international sanctions over Ukraine invasion were hampering Russia’s willingness and technical abilities to honor the terms and conditions of its obligations to foreign debt holders.  

As the impact of the international sanctions sink in, the credit ratings agency, Standard & Poor’s (S&P), has downgraded its assessment of Russia’s ability to repay foreign debt, signaling rising prospects that President Vladimir Putin’s government would 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 failed to raise dollars to make foreign bond payments. The Russian government arranged to pay its dollar denominated bond debts in local currency, rubles.

An S&P spokesperson said a selective default rating is when a lender defaults on a specific payment but makes others on time.

Although Russia has used strict capital controls, other severe measures and proceeds from oil and gas sales to artificially prop up the ruble, S&P said it didn’t expect Russia to be able to convert the rubles into dollars within the 30-day grace period allowed.

“We currently don’t expect that investors will be able to convert those ruble payments into dollars equivalent to the originally due amounts, or that the government will convert those payments within a 30-day grace period,” S&P said in a statement.

The Russian debt payment situation, according to S&P, would likely worsen as western countries unfold more sanctions that would further weaken the country’s capacity to meet its debt obligations.

It said 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 debt holders.”

Tightened sanctions placed on Russia after evidence the killing of civilians in the town of Bucha barred it from using any foreign reserves held in U.S. banks for debt payments.

Russia’s finance ministry said it resorted to its local rubles after the tightened sanctions prevented the payment of $649 million toward two bonds to a U.S. bank from being accepted.

Western sanctions have severely squeezed Russia’s economy, and S&P and other ratings agencies had already downgraded its debt to “junk” status, deeming a default highly likely.

Russia’s looming default on foreign debt would alter its unblemished status since the Bolshevik Revolution in 1917, when the Soviet Union emerged.