Russia’s first external default in a century now looks all but inevitable after another brutal week for the country’s finances.
First, the Treasury halted dollar debt payments from Russia’s accounts in U.S. banks, ramping up its restrictions on the country. Then, when an attempted hard-currency payment was blocked, Russia breached the terms on two bonds by paying investors rubles instead of dollars.
That pushed the countdown clock a step closer to default. It’s been ticking since Russia invaded Ukraine in February, and the U.S. and others swiped back with a clampdown on banks, companies and oligarchs. A freeze on the central bank’s foreign reserves unplugged Russia from the global financial system, making it the world’s most-sanctioned nation in a matter of days. With Vladimir Putin’s government hampered by asset blocks and branded a pariah by Western countries -- politically, economically and financially -- speculation has mounted that Russia would only be able to avoid a default for so long. The country’s bonds are already trading deep in distressed territory, and insurance on the debt now suggests almost a 90% chance that a default will happen this year, according to the latest figures from ICE Data Services.
Russia last defaulted in 1998, but on domestic debt. The last one on foreign debt was in the aftermath of the 1917 revolution. S&P said Saturday that it had declared Russia in a selective default after it used rubles to make a payment on a dollar-denominated bond on April 4.
There’s still uncertainty about what’s next, and further twists can’t be ruled out.
The dollar bonds that were serviced in rubles this week have 30-day grace periods, giving Finance Minister Anton Silvano time to find a workaround or push his argument that this isn’t a default because a payment was technically made. This week, he said the rubles transferred in lieu of dollars can be converted for creditors just as soon as the reserves freeze is eased.
“Western countries are trying in every possible way to make Russia declare default,” Silvano told state news service Tass this week. He also said Russia will use “other mechanisms” to make payments. In the meantime, the financial world waits for an official judgment on whether a default event has occurred.
But where that decision comes from is unclear. After a string of cuts that pushed Russia deep into junk, ratings firms are abandoning coverage because of an EU ban on providing ratings to the country. Moody’s Investor's Service and Fitch Ratings have already withdrawn, S&P Global said in its statement Saturday that it will respect the April 15 EU ban and all its ratings on Russia were subsequently withdrawn.
There’s also the Credit Derivatives Determinations Committee of buy-side and sell-side firms that vote on whether a credit event has taken place and whether default swaps have been triggered. The committee is already reviewing a question on the possible default of the state-owned railway operator, which failed to pay bond interest on time in March.
“If Russia does not manage to organize a payment route to bondholders within the grace period and no dollars arrive into the accounts, then it is a default, the CDS will trigger,” said Lutz Rose water, chief investment officer at Berlin-based Capital Asset Management.
You must be logged in to post a comment.