Russia is now exposed to a historic debt default: Here's what happens next

The U.S. has announced that it will not extend an exemption permitting Moscow to pay foreign debt to American investors in U.S. dollars, potentially forcing Russia into default.Up until Wednesday, the U.S. Treasury Department had granted a key exemption to sanctions on Russia's central bank that allowed it to process payments to bondholders in dollars through U.S. and international banks, on a case-by-case basis.This had enabled Russia to meet its previous debt payment deadlines, though forced it to tap into its accumulated foreign currency reserves in order to make payments.However, the Treasury Department's Office of Foreign Assets Control allowed the exemption to expire early Wednesday morning.Russia has built up substantial foreign currency reserves in recent years and has the funds to pay, so will likely contest any declaration of default on the grounds that it attempted payment but was blocked by the tightened sanctions regime.Moscow has a deluge of debt service deadlines coming up this year, the first being on Friday, when 100 million euros ($107 million) in interest is due on two bonds, one of which requires dollar, euro, pound or Swiss franc payment while the other can be serviced in rubles.Reuters and The Wall Street Journal reported Friday that the Russian Finance Ministry had already transferred funds in order to make these payments, but a further $400 million in interest is due late in June.In the event of a missed payment, Russia will face a 30-day grace period before likely being declared in default.Russia has not defaulted on its foreign currency debt since the Bolshevik Revolution in 1917.Central to the fallout from the OFAC's decision not to extend the waiver is the question of whether Russia will consider itself to be in default.Adam Solowsky, partner in the Financial Industry Group at global law firm Reed Smith, told CNBC on Friday that Moscow will likely argue that it is not in default since payment was made impossible, despite it having the funds available."We've seen this argument before where OFAC sanctions have prevented payments from going through, the sovereign issuer has claimed that they are not in default because they tried to make the payment and were blocked," said Solowsky, who specializes in representing trustees on sovereign bond defaults and restructuring."They are potentially looking at a scenario of prolonged litigation after the situation has resolved as they try to determine if there was in fact a default."Solowsky highlighted that Russia's situation is unlike the usual process for sovereign default, in which as a country nears default, it restructures its bonds with international investors."That's not going to be feasible for Russia at this time because basically under the sanctions, nobody can do any business with them, so the normal scenario that we would see play out is not what we would expect in this case," Solowsky said.He added that this will affect Russia's access to global markets and potentially drive up asset seizures both domestically and overseas."We're getting into some unknown territory.