LONDON (Reuters] Despite unprecedented Western sanctions, Russia has so far managed to keep its international debt from defaulting. However, the task seems harder. Moscow is threatening to decrease Europe’s gas supply and this appears to increase the difficulty.

What would a default do at this point?

What happens when a country fails to meet its obligations?

Russia may default if it does not pay any future bonds within the timeframes or pays in roubles when dollars, euros, or another currency are specified.

This kind of event is unimaginable prior to the February 24th invasion of Ukraine by Moscow, which Moscow calls a “specially military operation” and its subsequent sanctions that have led to hundreds of billions in dollars of frozen reserves.

Russia has been locked out from international borrowing markets by the West’s sanctions. A default would prevent Russia’s access to these markets until all creditors have been fully paid and any legal proceedings arising from this default are resolved.

In Argentina, defaults have led to aggressive creditors pursuing physical assets like a navy ship and the president’s aircraft. Russia’s state-owned energy companies own certain parts of Europe’s gas infrastructure, so there are many questions.

If countries and businesses that normally trade with Russia have their own rules prohibiting them from doing business with an entity, this could create problems.

Russia’s financial market reputation would be damaged even if sanctions were lifted at some time in the near future. It would affect Russia’s credit rating, and raise the rates of borrowing paid by companies and the government.

WHAT HAS HAPPENED UP TO THIS POINT?

Russia has so far avoided its first default since 1998’s financial crisis and the first one on international market debts since 1917 Bolshevik revolution, when it refused to recognize Tsar-era borrowings.

Moscow raised the stakes this week by offering to make the $2 billion bond payment next week. This is its largest of the year and will be made in rubles rather than dollars.

Russia shouldn’t force people who don’t want to pay in roubles, as it would not normally count as a default. However, this is a tricky situation. It is complicated by the fact that Russia’s main rating agencies were forced to withdraw its ratings. They won’t consider it a default regardless of what happens.

THE NEXT TEST

A fourth international bond payment of $447million is due Thursday. But even if Russia continues to be willing to pay, complications could soon mount up.

Western sanctions ban transactions with Russia’s finance ministry, central bank or national wealth fund, although the temporary general license 9A https://home.treasury.gov/system/files/126/russia_gl9a.pdf issued by the U.S. Office of Foreign Assets Control (OFAC) on March 2 makes an exception for the purposes of “the receipt of interest, dividend, or maturity payments in connection with debt or equity.”

The license will expire on May 25th. However, Russia will still have nearly $2 billion in external sovereign bond payments before the end.

Analysts predict that the second crucial test after Monday’s $2billion payment will take place on May 27, which is the first due payment after expiry of OFAC’s current licence.

Russia might be forced into making the payment in Russia in rubles, or in Russia bank accounts. The finance ministry said that this would be Russia’s fallback option.

However, this would not be considered as a default since the bond terms require that it be returned in dollars.

Russia currently has 15 outstanding international bonds with an estimated face value of $40 billion. Before the Ukraine crisis, around $20 billion had been held in foreign investment funds or money managers.