Sanctions-induced sovereign default
A default by a country that has the funds and intends to pay, but whose payments are blocked by another country's sanctions or by the freezing of its assets.
A classic sovereign default comes from an inability or a refusal to pay. A sanctions-induced default is a third kind: the debtor country can and wants to pay, but paying agents, central securities depositories or correspondent banks are not allowed to pass its funds on, or its reserves are immobilized. Under the bond contracts the outcome is the same: the holder does not receive the payment on the due date, and the grace period runs out. The debtor pleads force majeure and a third party's act; creditors and rating agencies record a default. For political risk and credit insurance, the case forces a second look at the cause of nonpayment: the blocking act is that of a country outside the contract, often the insured's own government, which runs into sanctions clauses.
On May 25, 2022, the US Treasury let expire the license that allowed Russia to pay its foreign bondholders. Coupons of about 100 million dollars due on May 27 were not received by the end of the thirty day grace period, and on June 27, 2022 Moody's recorded Russia's first default on its foreign currency debt since 1918, while Moscow insisted it had paid.
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