S&P: Russia entered "selective default." Russia: We're suing.

Can a lawsuit fix Russia’s fiscal collapse? We’ll soon find out, but let’s just say the prospects look grim — even if Vladimir Putin managed to haul Clarence Darrow out of his grave to represent the plaintiffs. Russia’s decision to make two bond payments in rubles rather than in dollars as required by contract puts them into “selective default,” Standard & Poor’s announced.

They have thirty days to replace the rubles with dollars, or else S&P and other bond rating agencies will declare Russia entirely in default. The clock is ticking:

S&P Global has placed Russia under a “selective default” rating after the Russian government said last week that it had repaid about $650 million in dollar-denominated debt in rubles.

The ratings agency said late Friday that it didn’t expect investors to be able to convert the ruble payments into U.S. dollars that were equivalent to the original amount due, pushing Russia toward its first default on foreign currency sovereign debt in more than a century.

The bonds do have a 30-day grace period, giving the Russian government time to repay in dollars or find some other way to avoid a default. S&P Global said it didn’t expect the government to convert the payments within the grace period.

“Sanctions on Russia are likely to be further increased in the coming weeks, hampering Russia’s willingness and technical abilities to honor the terms and conditions of its obligations to foreign debt holders,” the ratings agency said.

Russia does have one thing going for it in this moment. Sanctions by the EU prevent Western ratings agencies from providing any rating at all for Russian entities after this Friday, April 15. That means that they cannot directly rate Russia as having defaulted after the 30-day grace period has expired. It also means that any Russian entities needing credit will almost certainly be unable to access investment except from those willing to evade Western sanctions and potentially find themselves locked out of global financial systems such as SWIFT.

Call it an effective default rather than a selective default. And that’s already begun.

What can Russia do to reverse its fortunes? Well, Putin could, y’know, stop invading other countries and committing war crimes. He seems unprepared to do that, so instead Russia will sue to reverse the default finding. Good luck with that in any country whose name doesn’t rhyme with Shrusha:

Russia is now planning legal action.

“We will sue, because we undertook all necessary action so that investors would receive their payments,” Finance Minister Anton Siluanov told pro-Kremlin Izvestia newspaper on Monday.

“We will show the court proof of our payments, to confirm our efforts to pay in rubles, just as we did in foreign currency. It won’t be a simple process,” he added. He did not say who Russia planned to sue.

That’s actually a good question. Who will they sue? If they sue S&P or other bond raters, those bond raters would simply refuse to provide any rating on Russian entities long after the sanctions fade away. That in itself would likely scare off investors for a long time, or force Russia to pay far higher interest payments for their debt.  Russia could sue the US and the EU to recover its foreign assets, but courts in both places are usually loathe to interfere in foreign relations — and certainly won’t want to do so to benefit war criminals.

They could take their case to a court in Moscow. That and 500 rubles will get you a café latté at Starbucks, if you could in fact find a Starbucks or a Mickey D’s in Moscow these days. S&P isn’t going to worry what a Putin judicial flunky thinks, and courts in places where it matters aren’t going to entertain the idea of allowing Putin to unilaterally rewrite contractual obligations to use specific currencies.

They’ll probably just litigate this in the media for the benefit of the benighted Russian masses:

Kremlin spokesperson Dmitry Peskov said in a press conference last week that any default would be “artificial” because Russia has the dollars to pay — it just can’t access them.

“There are no grounds for a real default,” Peskov said. “Not even close.”

The check’s in the mail is not something creditors like to hear. If Russia can’t meet its debt obligations because their foreign reserves got frozen over their criminal activities, that’s a real default. Threatening a lawsuit demonstrates just how lame this argument is.  Peskov’s micturating into a hurricane here, and it’s not even his most embarrassing moment of late. Here’s the crowning glory of Moscow’s bumbling propaganda efforts, as Sky News face-rubs Peskov on live TV.

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