(Adds S&P statement, paragraph 2)
LONDON, April 8 (Reuters) - Russia faces its first sovereign external default in over a century after it made arrangements to make an international bond repayment in roubles earlier this week, even though the payment was due in U.S. dollars.
S&P on Saturday lowered the country's foreign currency ratings to "selective default" on increased risks that Moscow will not be able and willing to honour its commitments to foreign debtholders.
Russia has not defaulted on its external debt since the aftermath of its 1917 revolution, but its bonds have now emerged as a flashpoint in its economic tussle with Western countries. A default was unimaginable until recently, with Russia rated as investment grade in the run up to its Feb. 24 invasion of Ukraine, which Moscow calls a "special military operation".
Here are answers to key questions:
CAN RUSSIA PAY?
Russia was due to make a payment of $649 million to holders of two of its sovereign bonds on Monday. But the U.S. Treasury blocked the transfer, preventing Russia from using any of its frozen foreign currency reserves for servicing its debt.
Coming up with an alternative, Russia placed the rouble equivalent of those payments for bondholders from so-called unfriendly nations in special accounts at its National Settlement Depository.
Moscow has a 30-day grace period from the payment date, which was Apr. 4.
Analysts say Russia has the means and ability to pay. The country receives billions in U.S. dollars in revenue from energy exports, and while around half its foreign exchange reserves are frozen, it has hundreds of millions that are not.
Elina Ribakova, deputy chief economist at the Institute of International Finance, said this was likely a "willingness-to-pay situation."
The U.S. Treasury did not ban correspondence banking with Russia, subject to checks, and has granted a license to allow for payments relating to Moscow servicing sovereign debt until May 25.
All this means it looks like Russia could still make the payment, if it wanted to, according to analysts.
WHAT TYPE OF DEFAULT?
At its most basic level, a default is a breach of contract, though the term can cover a variety of scenarios.
Payment default is a failure to pay principal, interest or other amounts due after the grace period has passed, according to a paper by restructuring experts file:///C:/Users/8017535/Downloads/chapter-7-sovereign-default.p df at the International Monetary Fund.
However, there are also technical defaults due to events such as administrative errors, generally viewed by market participants as minor and swiftly remedied.