Russian Railways operates passenger and cargo services. Credit: S. Hermann & F. Richter from Pixabay.

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A derivatives panel has ruled that state-owned Russian Railways is in default after failing to make a bond interest payment as international sanctions put strains on the domestic economy.

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Credit Derivatives Determinations Committee (CDDC) noted that a ‘failure to pay’ credit event linked to Russian Railways has occurred after a coupon due last month did not reach the investors following the ten-day grace period, Bloomberg reported.  

According to the report, Russian Railways tried paying the bond coupon last month. However, the holders did not receive it due to ‘legal and regulatory compliance obligations within the correspondent banking network’.

Several countries imposed harsh sanctions on Russia after it invaded neighbouring Ukraine in February 2022. Moscow terms its action in Ukraine as a ‘special military operation’.

The legal implications of the sanctions have persuaded Western banks and other financial intermediaries to block bond payments, thereby increasing difficulties for Russian borrowers to make transactions, Bloomberg added.

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The CDDC decision will not have a direct impact on bond investors.

However, this is the first time a Russian debt instrument was classified as defaulted since the beginning of the invasion.

Separately, Reuters reported that Russian Finance Minister Anton Siluanov warned that it may take legal action if the Western countries forces it to default on sovereign debt.

Russian Railways manages infrastructure, as well as operates passenger and cargo services in the country.

Recently, a missile strike on an eastern Ukrainian railway station killed at least 39 people and injured nearly a hundred as the conflict enters seventh week.