LONDON (Reuters – Russia is facing its first external sovereign default since over a century. Russia has made agreements to pay an international bond payment in roubles, despite the fact that it was due in U.S. dollar.

Russia has not defaulted in respect of its foreign debt since its 1917 revolution. However, its bond issues have become a flashpoint for its economic struggle with Western countries. It was impossible to imagine a default until very recently. Russia’s investment grade rating in the period leading up to Russia’s invasion of Ukraine on February 24, which Moscow refers as a “specially military operation”, meant that it could not be categorized as an unfavorable risk.

These are the key questions we can answer:

CAN RUSSIA PAY?

On Monday, Russia was scheduled to pay $649 million to two holders of sovereign bonds. However, the U.S. Treasury rebuffed the payment and stopped Russia from using any frozen foreign currency reserves it had to pay its debt.

Russia came up with an alternate solution. It placed the Russian rouble equivalent to those bondsholders of unfriendly countries in special accounts at its National Settlement Depository.

Moscow allows for a 30 day grace period after the due date (April). 4.

According to analysts, Russia is able and able to pay. It receives billions of dollars from oil exports and has many millions left over.

Elina Ribakova (deputy chief economist, Institute of International Finance) stated that this is likely to be a “willingness/to-pay” situation.

Although the U.S. Treasury didn’t ban Russian correspondence banking, it did check that payments related to Moscow servicing sovereign debt were allowed until May 25.

According to analysts, this suggests that Russia might still pay the money if needed.

WHAT IS THE TYPE OF DEFAULT

A default can be described as a breach or non-performance of a contract at its most fundamental level. However, it may also cover many other scenarios.

A paper by the International Monetary Fund restructuring specialists states that payment default means failure to pay principal, interest, or other amounts due within the grace period.

But, technical failures can also be caused by administrative mistakes, but these are generally considered minor issues and easily corrected.

According to legal experts, payment in the wrong currency (in this case, rubles) constitutes non-payment.

Russia dismissed any suggestion of default.

Dmitry Peskov, spokesperson for the Kremlin, stated Wednesday that a default scenario could theoretically be made but it would only be artificial. There are no reasons to declare a default.

WHO WOULD CALL A DEFAULT?

Credit-rating agencies are often called upon by markets to report a default. However, a default does not constitute a credit rating. It is also unclear what announcements may be made, as major ratings agencies have withheld ratings for Russia.

The consequences of a default could be more severe. For example, it could cause credit default swaps to be activated (CDS), which is an insurance policy that has been purchased by investors in such cases. An assessment committee will determine if there has been a nonpayment. However, this decision will usually be taken after the grace period expires.

Russia currently has around $6 billion of CDS agreements.

WHAT ELSE CAN HAPPEN

Russia can unilaterally announce a moratorium, a stoppage of payments for a period or a permanent duration.

A moratorium is an announcement of legislation or legislation that separates from the default payment. According to the IMF, it can be either before or after payment default.

An interim measure that stops payments from being made before restructuring debt might be announced by a government. Mexico’s announcement in 1982 was an example of this.

A declaration of a moratorium can also trigger CDS contracts.

WHAT HAPPENS IN THE END AFTER A DEFAULT

Funds that specialize in distress situations often buy debt obligations in default or at risk. They either hope to make money once a restructuring has been completed or they want to sue the courts to get compensation.

But asset seizing and litigation are costly, time-consuming and expensive. Many of the previous unsuccessful attempts were made to seize Argentina’s iconic navy ship, the ARA Libertad in 2012. This was due to a decade-old debt default and Argentina’s dinosaur fossils that had been displayed in Europe.