Russia nears debt default, forced to pay bondholders in rubles

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Russia moved closer to a possible default on its international debt on Wednesday as it paid dollar bondholders in rubles and said it would continue to do so while its foreign exchange reserves are blocked by sanctions.

The United States on Monday blocked Russia from paying its sovereign debt holders more than $600 million from frozen reserves in US banks, saying Moscow had to choose between depleting its dollar reserves at home or defaulting.

Russia has not defaulted on its foreign debt since it defaulted after the 1917 Bolshevik revolution, but its bonds have re-emerged as a flashpoint in the diplomatic crisis and sanctions between Moscow and Western capitals.

“This speeds up the timeline when Russia runs out of room in terms of willingness and ability to pay,” a fund manager who had one of the bonds due said Monday.

The Kremlin said it would continue to pay its dues.

“Russia has all the necessary resources to pay its debts… If this blockade continues and payments intended to pay the debts are blocked, (the future payment) could be made in rubles,” Kremlin spokesman Dmitry Peskov said.

Moscow managed to make a series of currency coupon payments on some of its 15 international bonds with a face value of around $40 billion outstanding before the United States halted such transactions.

While the sanctions have frozen about half of Russia’s $640 billion of gold and foreign currency reserves, the country still receives billions of dollars from oil and gas exports.

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Russia’s Finance Ministry said on Wednesday that it had to pay rubles to holders of its dollar-denominated Eurobonds due in 2022 and 2042, as a foreign bank refused to process a $649 million payment order to investors. sovereign debt holders.

The Finance Ministry said the foreign bank, which it did not name, refused Russia’s order to pay coupons on the two bonds and also failed to process a payment on a Eurobond due in 2022.

Russia’s ability to meet its debt obligations is in the spotlight after widespread sanctions in response to what Moscow calls “a special military operation” in Ukraine froze nearly half of its reserves and limited access to global payment systems.

‘artificial situation’


The US Treasury blocked JP Morgan, which had been processing Russian sovereign bond payments as a correspondent bank, from making the two payments due Monday, a source familiar with the situation said. JP Morgan declined to comment.

Russia could consider allowing foreign holders of its 2022 and 2042 Eurobonds to convert ruble payments into foreign currencies once access to their foreign exchange accounts is restored, the Finance Ministry said.

Until then, the ruble equivalent of Eurobond payments going to bondholders from so-called hostile nations will be held in special ‘C’ type accounts at Russia’s National Depository for Payments, the ministry added.

Both bonds were issued in 2012 and stipulate payment in US dollars, unlike some bonds that were sold later and allow payment in alternative currencies such as the euro, the British pound, the Swiss franc or even the ruble.

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Russia has a 30-day grace period to make the dollar payment, but if the cash does not appear in the bondholders’ account within that time, it would constitute a default, global ratings agencies said.

Moscow introduced strict capital controls to prop up its currency after the war, which, combined with financial sanctions, make it impossible for foreign investors to repatriate any payments.

The default warnings shone brightly again on Wednesday.

One-year forward credit default swaps, a way to secure exposure to Russia’s sovereign debt, rose 60 to 69 points, according to IHS Markit.

Longer-dated dollar bonds from Russia, where trading has all but ceased, were trading well below 20 cents on the dollar, while euro-denominated issues were bid at 15 cents.

default fallout

Russia dismissed this as a default situation.

“In theory, a default situation could be created, but this would be a purely artificial situation,” Peskov said. “There is no reason for an actual breach.”

Bondholders had been tracking bond payments since Moscow’s sweeping sanctions and countermeasures that severed Russia from the global financial system.

A Russian default would have been unthinkable before the invasion, as the country still had an investment grade rating as of February from the major rating agencies.

Russia is already barred from international lending markets due to Western sanctions, but a default would mean it could not regain access until creditors have been fully repaid and legal cases stemming from the default are resolved.

A default could also create a number of headaches if countries or companies that would normally trade with Russia have self-imposed rules that prohibit transactions with a defaulting entity.

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In addition, Russian debt default insurance policies known as credit default swaps (CDS) contracted by investors for this type of situation could be activated. JP Morgan estimates that there are approximately $6 billion worth of CDS outstanding that would need to be paid out.

Russia on Wednesday paid coupons on four ruble OFZ Treasury bonds. These were once popular for their high yields among foreign investors, who are now unable to receive payments as a result of Russian sanctions and retaliation.



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