By Davide Barbuscia and Sujata Rao
NEW YORK/LONDON (Reuters) - Russia is on the cusp of a unique kind of debt crisis which investors say would be a first time a major emerging market economy is pushed into a bond default by geopolitics, rather than empty coffers.
Until the Kremlin launched an attack on Ukraine on Feb. 24, few would have entertained the possibility of Russia defaulting on its hard currency bonds. Its strong solvency track record, bumper export revenues and an inflation-fighting central bank had made it a favourite of emerging market investors.
But the U.S. Treasury's decision not to extend a licence allowing Russia to keep up debt payments despite wide-ranging sanctions, have set Moscow on the road to default.
The Russian finance ministry has wired some $100 million in interest payments on two bonds due on Friday to its domestic settlement house. But unless money shows up in foreign bondholders' accounts, it will constitute a default by some definitions.
And even if funds go through this time, payments of nearly $2 billion are due by the end of the year. One in late June is mandated to be settled outside Russia - a task experts predict will be impossible without the U.S. waiver.
Emerging market debt crises are nothing new -- Russia itself reneged on its rouble bonds in 1998. Geopolitics too have spilled into the debt sphere before, forcing defaults in Venezuela and Iran for instance.
Yet in Iran's case, small amounts of loan debt were hit by U.S. sanctions after its 1979 revolution, while Venezuela's economy was already on its knees before U.S. curbs in 2019 pushed $60 billion in sovereign and sub-sovereign debt across the brink.
Russia meanwhile continues to rake in oil and metals earnings. Even with half its $640 billion reserves' war chest frozen by sanctions, the central bank has enough cash to repay the $40 billion outstanding in sovereign hard currency debt.
"This is a completely different crisis from other emerging market crises, it's not about ability or willingness to pay, they technically cannot pay," said Flavio Carpenzano, investment director at Capital Group, an asset manager that - like many others - was exposed to Russia before war erupted.
The impact is amplified by the fact this would be Russia's first major foreign bond default since just after its 1917 Bolshevik revolution. Sanctions on Russia and its own countermeasures have effectively severed it from global financial systems.
Comparisons with recent defaults such as Argentina in 2020 are inappropriate because most countries' finances are strained when defaults happen, said Stephane Monier, chief investment officer at Lombard Odier.