Russia has defaulted on its foreign debt for the first time since the Bolshevik Revolution over a century ago, increasing the country's isolation from the global financial system following sanctions imposed due to its war in Ukraine.

Moscow owes $100 million in interest on a dollar-denominated bond and another in euros, which was originally due on May 27. The 30-day grace period ended on Sunday, with Moody's rating agency announcing on Monday that Russia is in default.

Last month, the U.S. Treasury ended Russia's ability to repay its billions of dollars in debt to international investors through American banks. In response, the Russian Finance Ministry said it would pay dollar-denominated debts in rubles and provide an "opportunity for later conversion to the original currency."

Before Moody’s announcement, it was largely believed that Russia was in arrears.

Oslander, a sovereign debt attorney at Wilk Auslander in New York, said, “Russia is in default. The 30-day grace period has ended. And now Russian bondholders do not have their money.”

Russia says it has enough money to repay its debts, but Western sanctions have created "artificial obstacles" by freezing its foreign currency reserves held abroad.

Kremlin spokesman Dmitry Peskov told reporters on Monday that "there are no reasons to call this situation a default," saying Russia has paid these debts but cannot transfer them due to sanctions. Conversely, Oslander says Russia claims "this is happening because of sanctions, but the sanctions were entirely under Russia’s control." “All Russia had to do was ‘not invade Ukraine.’”

Here are some basic things to know about Russia’s payment default:

How much does Russia owe?

About $40 billion in foreign currency bonds, roughly half of which were sold to foreign buyers. Before the war started, Russia had about $640 billion in foreign currency and gold reserves, most of which are held abroad and are now frozen.

Russia has not defaulted on its international debts since the Bolshevik Revolution, when the Russian Empire collapsed and the Soviet Union was established. Russia defaulted on its domestic debts in the late 1990s but managed to recover from that default through international assistance.

Liam Peach, an economist specializing in emerging European markets at Capital Economics, said Russia has effectively been in default for months in the eyes of bond investors.

Insurance contracts covering Russian debt have priced the likelihood of default at 80% for weeks, with rating agencies like Standard & Poor’s and Moody’s placing the country's debt in junk bond status.

How do you know if a country is in default?

Rating agencies are usually the entities that will declare default in Western financial markets, as happened on Monday. A court can also decide the case. Bondholders can ask a committee of representatives from financial firms to decide whether failure to repay debts should trigger compensation payments.

What can investors do?

The official way to declare default is through an announcement by 25% or more of bondholders that they have not received their money. Once that happens, the terms say all other Russian foreign bonds are in default, and bondholders can then seek a court ruling to enforce payment.

Under normal circumstances, investors and the defaulting government typically negotiate a settlement whereby bondholders are given new bonds of lesser value but at least receive some partial compensation.

However, sanctions prevent dealings with the Russian Finance Ministry. No one knows when the war will end or what the value of the defaulted bonds is.

Oslander said in this case, declaring default and suing "may not be the wisest option." It is not possible to negotiate with Russia, and many things are unknown, so creditors may "decide to wait patiently now."

Investors who wanted to exit Russian debt may have already headed for the exits, leaving those who may have bought the bonds at distressed prices hoping to benefit from a long-term settlement.

Once a country defaults, it can be cut off from borrowing in the bond market until the default is resolved and investors regain confidence in the government’s ability and willingness to pay. But Russia is already isolated from Western capital markets, so any return to borrowing is still far off anyway.

The Kremlin can still borrow rubles domestically, relying mostly on Russian banks to buy its bonds.

What is the impact of Russia’s default?

Western sanctions due to the war have driven foreign companies out of Russia and cut the country’s trade and financial links with the rest of the world, where the default will increase that isolation and turmoil within Russia.

Chris Weafer, a veteran Russian economy analyst at Macro advisory firm, said default will not affect the Russian economy immediately because the country has not borrowed internationally for years and earns a lot of money from exporting commodities like oil and natural gas.

But in the long run, when the war ends and Russia tries to rebuild its economy, “this is where the legacy of the default will be a problem. It’s somewhat like if an individual or a company gets a bad credit rating, it takes years to get past that.”

Bondholders—such as funds investing in emerging market bonds—could suffer heavy losses. However, Russia has only played a small role in emerging market bond indices, limiting investor financing losses.

Peach said, “The spillover to the rest of the world should be limited.”

Weafer said Russia’s default could have a cascading effect by increasing stress on global debt markets and making investors more risk-averse and less willing to put up money, which “could lead to more defaults in other emerging markets.”

Edited by: Dima Abu Khair