Russian debt - to pay or not pay?

Lots of focus on this $117m coupon payment due on Russian hard currency debt due yesterday whether Russia is heading into default.

My sense here is that the MOF and CBR will keep everyone guessing. They will likely use the grace period to the full. 

There seems to be no reason why they cannot pay, as per US Treasury comment.

But the Russian side will be looking to encourage bondholders to lobby the UST to lift the sanctions on the CBR to ensure payment. 

I just don’t see what OFAC would do this. It’s in Russia’s interest to pay as if they don’t they will go into default and that would have costs and consequences on Russia for a very long time. Indeed, Russia could be paying for their decision not to pay for a decade to come in low ratings, higher borrowing costs, lower investment, lower growth and lower living standards. And for Putin that could ultimately mean social unrest domestically challenging his regime - he already looks to be losing this war.

You could also ask why OFAC should worry about Western investors long Russia risk going into this conflict, when Western governments made absolutely clear that this invasion was coming? Feels like that is a moral hazard issue therein. But these investors are big boys, they made their punt, and now will have to bear the cost. In any event most sensible Western investors got out long before the conflict, and the biggest holders now of Russian assets, by far are Russians themselves. Looks like there is around $40bn foreign exposure to Russian sovereign debt, local and foreign, which is much lower than 1998. So if a default happened, this would not be a systemic global event, like 1998. A default would be a huge problem for Russia, but not international capital markets.

As an aside Russia should already be in default in my mind for the OFZ payments in roubles which should have been made over a week back. The MOF paid locals but not foreigners and there was no grace period on the bond documentation. For some inexplicable reason the ratings agencies decided not to call an immediate default on Russia but gave the MOF a free 30 day grace period. I just don’t get why ratings agencies are doing Russia favours here. Can someone explain? This seems to be working against Ukrainian, and indeed Western government, interests. Who’s side are they on here?

Regulators need to investigate why rating agencies got their Russia calls so wrong, having to downgrade 8 notches or so AFTER the invasion, even though Western governments spelt out that an invasion was coming. And why no default on the OFZs called already given no 30 day grace period? Does Russia get preferential treatment for some reason?