Russia Defaults on Foreign Debt for First Time in a Century, Facing Much Higher Inflation than USA

Russia defaults on bond payments as economy weakens due to sanctions from the Ukraine invasion.

Russia has defaulted on bond payments that were due Sunday night. According to holders of two different foreign currency bonds, Russia did not make the interest payments that were due to them.

The default comes after the West placed sanctions on Russia, following their aggressive and deadly invasion of Ukraine. The U.S. and its allies have disconnected Russia from the global financial system, leaving them unable to pay foreign currency bonds.

Russian state media claims that Russia has the money to pay the bonds, but is unable to access those funds since they’ve been blocked by European nations and the U.S. This is the first time since 1918 that Russia has defaulted on foreign borrowing.

The short term effects of the default are minimized given it was expected because of the sanctions. However, experts say in the long run Russia will have a hard time re-entering international financial networks.

The default is hardly Russia’s only financial trouble. Russian inflation has soared since the invasion of Ukraine. In Russia, prices in May were 17% higher than the year before, according to the Wall Street Journal. To put it in context, for the U.S., which is also facing inflation, prices in May were 8% higher.

Since sanctions are reducing the supply of goods, the inflation is not predicted to get much better for Russia. Also due to the sanctions, the Russian economy is forecasted to shrink by close to 10% this year, a World Bank report says.

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Russian Inflation

(Percentage Increase Over Time)

High energy prices across the world are currently softening the financial blow to Russia, as the country provides 40% of oil imports to the European Union. However, since the invasion began, the E.U. has put plans in motion to reduce their dependence on Russian oil.

These actions are showing Russian President Vladimir Putin that his invasion of a sovereign nation will not go unpunished, and sends the message that the rest of the world is watching.