A sovereign default can lead to a banking crisis and higher prices for consumers.
Russia claimed to have made payments to investors on Thursday despite having its assets frozen under Western sanctions and avoiding defaulting on its debts.
“The payment order on the repayment of interest on bonds (…) with a total value of $117.2 million… was carried out,” the Russian Finance Ministry said in a statement.
There had been fears this week that Russia would default on the payments given strict measures against Russian banks in response to the war in Ukraine.
Western sanctions slapped on Russia’s Central Bank are preventing the institution from using almost half of its $640 billion in foreign reserves to pay back its creditors.
What is a default?
Countries raise money to finance their budget by issuing governments bonds. Investors and institutions around the world buy these bonds under the assumption they will get their money back with higher interest rates. Repayments are scheduled to be made in a timely manner.
This sovereign debt is usually owned in foreign currencies, which means a struggling government cannot simply print more money of its national currency to have fast access to liquidity and appease its creditors.
When an economic crisis becomes particularly challenging, an indebted country might find itself unable to repay some or even all of its accumulated debts.
If the government fails to honour a payment, the country officially enters into default.
Besides huge losses for investors, defaulting often entails devastating consequences for citizens and businesses and can lead to long-lasting reputational damage.
Watch the video explainer to learn more about what default means.