Russian President Vladimir Putin meets with the head of the Federal Financial Monitoring Service (Rosfinmonitoring) Yury Chikhanchin at the Kremlin in Moscow, Russia, June 27, 2022.
Mikhail Metzel | Kremlin | sputnik | via Reuters
Russia entered its first major default on its foreign debt in more than a century, after a grace period on two international bond payments expired on Sunday night.
Interest payments totaling $100 million were due May 27 and subject to a grace period that expired Sunday evening. Several media reported that the bondholders had not received the payments, after Russia’s attempts to pay in its ruble currency were blocked by international sanctions.
The Kremlin has dismissed the claim that Russia is in default, spokesman Dmitry Peskov reportedly said in a press call this morning that Russia had made the bond payments due in May, but that they were blocked by Euroclear due to Western sanctions, making the non-delivery of payments “not [Russia’s] problem.”
The sweeping sanctions imposed by Western powers in response to Russia’s unprovoked invasion of Ukraine, along with Moscow’s countermeasures, have effectively ostracized the country from the global financial system, but so far the Kremlin managed to find ways to get payments from bondholders on several occasions. .
Attempts to circumvent sanctions, however, took another hit in late May, when the US Treasury Department allowed a key exemption to expire. The waiver previously allowed Russia’s central bank to process payments to dollar bondholders through US and international banks on a case-by-case basis.
Russian Finance Minister Anton Siluanov suggested earlier this month that Russia may have found another means of payment. Moscow transferred the $100 million in rubles to its domestic settlement house, but the two bonds in question are not subject to a ruble clause that would allow the payment to be converted into national currency abroad.
Reuters reported early Monday, citing two sources, that some Taiwanese holders of Russian Eurobonds had not received interest payments due on May 27, indicating that Russia may be entering its first debt default. since 1918, despite having sufficient liquidity and willingness to pay. .
Siluanov reportedly told Russia’s state-run RIA Novosti news agency that the blocking of payments did not constitute a true payment default, which usually results from unwillingness or inability to pay, and called the situation a “farce “.
Another $2 billion in payments are due before the end of the year, although some of the bonds issued after 2014 are allowed to be paid in rubles or other alternative currencies, depending on the contracts.
Although signals indicate that the payments have indeed been blocked by international sanctions, it may take some time to confirm the default.
Adam Solowsky, a partner in the financial industry group at international law firm Reed Smith, told CNBC on Monday that the key question will be whether the nonpayment is classified as a default under the specific documentation on the obligations, which is more complicated than a payment default received.
Russia claims to have made the payments to clearing systems, where they were blocked from reaching bondholders.
“Specifically, the question is whether payment to the clearing systems is sufficient to meet payment requirements under the bondholder documents, or whether only receipt by bondholders is effective,” Solowsky said.
He added that the issue has significance beyond the May 27 payment, as cross-default provisions in other debts may be triggered if found to be in default.
“The existence of a Russian default may need to be resolved through litigation, but given the current state of sanctions, a judgment in favor of investors may not result in a payment anytime soon” , did he declare.
“Given the G-7 announcement over the weekend that member countries plan to ban the import of Russian gold, there appears to be an intention to continue to increase Russian sanctions.”
If an intermediary withholds payment, Solowsky said, it may be necessary to pursue “inter-litigation” action to receive instructions on what to do with the funds.
“In an interlitigator, a party holding funds known to be the subject of disputed claims seeks court intervention to resolve the dispute,” he said.
Decades of default?
Timothy Ash, senior emerging markets sovereign strategist at Bluebay Asset Management, said while the default may not have much immediate impact on the market, longer-dated Russian sovereign Eurobonds which were trading at 130 cents before the invasion have already collapsed to between 20 and 30 cents, and are now trading at default levels.
“Indeed, Russia probably already defaulted on some ruble-denominated instruments owed to foreigners in the weeks following the invasion, although having withdrawn their ratings, the rating agencies were unable to to call it a flaw,” Ash said in a note Monday.
“But this default is important because it will impact Russia’s ratings, market access and funding costs for years to come. And important here, given that the US Treasury has forced Russia to do default, Russia can only emerge from default when the U.S. Treasury gives bondholders the go-ahead to negotiate terms with Russia’s foreign creditors.”
Ash suggested that this process could take years or decades, even in the event of a ceasefire that does not result in a full peace agreement, which means that Russia’s access to foreign funding will remain limited. and that it will face higher borrowing costs for a long time to come. .
He argued that alternative sources of Russia’s foreign financing beyond the West, such as Chinese banks, would also be reluctant to look beyond the default headlines.
“If they are prepared to take the risks of secondary sanctions – which they have not done so far – and continue to lend to Russia, they will add a huge risk premium to lending rates in the prospect of being dragged one way or another into future debt restructuring negotiations,” Ash said. said.
“It makes lending to Russia all the more difficult as people will avoid it. And that means lower investment, lower growth, lower living standards, flight of capital and people (flight of brains) and a vicious cycle of decline for the Russian economy.
So far, Russia has managed to put in place effective capital controls that have supported the ruble and continued to earn substantial revenues from energy exports due to soaring oil and gas prices.
However, Ash suggested that the carbon transition and accelerating Western diversification away from Russian energy and raw materials means that this “goose that lays the golden egg is done two to three years later.”
“Thus, over a two- to three-year perspective, Russia faces a slump in export earnings, with almost no access to international financing due to sanctions and defaults,” he said.
“Meanwhile, with much of Putin’s military destroyed in Ukraine, he will find it difficult to fund the military reconstruction he will be desperate to achieve given his desire to retain some sort of parity with NATO. .”
The resulting diversion of resources away from consumption and into military investments, Ash explained, could lead to a prospect of “decay and decay” for Putin’s Russia.
Russia slides to historic default as payment deadline expires
Source link Russia slides to historic default as payment deadline expires