Russia defaulted on its foreign currency sovereign debt for the first time in 100 years, the culmination of ever-tougher Western sanctions which shut down payment channels to overseas creditors.
The country has been able to avoid the sanctions imposed by the Kremlin after its invasion of Ukraine for months. The grace period for about $100 million in snared interest payments due on May 27 ran out at midnight on Sunday. This deadline is considered an event de default.
This is a sad sign of the country’s rapid economic, financial, and political transformation. Since March began, Eurobonds in the nation have been trading at distress levels. The central bank’s foreign reserve remains frozen and the largest banks are cut off from the global financial system.
However, given the extent of the damage done to the markets and economy, the default is mainly symbolic at the moment and doesn’t matter to Russians who are dealing with double-digit inflation, severe economic contraction, and the worst economic growth in many years.
Russia has responded to the default designation by claiming that it has the money to pay any bills and was not forced into payment. It tried to get out of the default designation by stating last week that it would start servicing its $40 billion outstanding sovereign debt in rubles. This was in protest at a “force majeure” situation, which it claimed was manufactured by the West.
Hassan Malik is a senior sovereign analyst at Loomis Sayles & Company LP. “It’s a very rare thing,” he said. It’s going to be one of the biggest watershed defaults in human history.
Rating firms would normally make a formal declaration, but European sanctions forced them to withdraw their ratings for Russian entities. The documents for the notes, whose grace period expired Sunday afternoon, state that holders can call one if 25% of outstanding bonds agree to an “Event of Default”.
Now that the deadline has passed, investors can focus on what they do next.
They do not have to act immediately and may prefer to follow the progress of the war in the hopes that sanctions will be eased. They may have time on their side. According to the bond documents, the claims are only void for three years after the payment date.
Takahide, an economist at the Nomura Research Institute in Tokyo, stated that “most bondholders will continue to wait-and-see.”
Russia’s default Tussle with Bondholders is Just Beginning
During Russia’s 1998 financial crisis and ruble collapse, President Boris Yeltsin defaulted on $40 Billion of its local debt.
Russia’s last default with foreign creditors occurred more than 100 years ago when the Bolsheviks, under Vladimir Lenin, repaid the nation’s enormous Czarist-era debt in 1918.
It was close to a trillion dollars today, according to Loomis Sayles’ Malik. He is also the author of ‘Bankers & Bolsheviks: International Finance & the Russian Revolution.
Comparatively, foreigners had the equivalent of almost $20 billion worth of Russia’s Eurobonds at the beginning of April.
He said that sanctions were a response to action by the sovereign entity. This was in reference to the invasion of Ukraine. History will see this in the latter light, I believe.”
Anton Siluanov, Finance Minister, dismissed the situation as a “farce” on Thursday.
He reiterated that the country is able to pay, with billions of dollars still flowing into state coffers every week from energy exports, despite the ongoing conflict in east Ukraine.
Siluanov stated that anyone can declare what they want. “But, anyone who is able to understand what’s happening knows that this is not a default.”
The grace period, which ended Sunday, prompted his comments. When investors did not receive coupon payments on May 27, for dollar- and euro-denominated bonds, the 30-day window was activated.
After the US Treasury closed a loophole in its sanctions, the cash became stuck. This was because it removed an exemption that allowed bondholders from receiving payments from the Russian sovereign. The European Union also sanctioned Russia’s payment agent, the National Settlement Depository, a week later.
Vladimir Putin responded by introducing new regulations that state Russia’s obligations to foreign-currency bonds will be fulfilled when the correct amount of rubles is transferred to the local payment agent.
According to Friday and Thursday, the Finance Ministry paid its latest interest payments of approximately $400 million. None of the underlying bonds allows settlement in local currency terms.
It’s not clear if investors will utilize the new tool, and if existing sanctions would allow them to repatriate any of the money.
Siluanov says that it is not sensible for creditors to request a declaration de default through the courts, as Russia hasn’t waived sovereign immunity and no foreign court would be able to.
He said, “If we eventually get to the point when diplomatic assets are claimed then this is tantamount severing diplomatic relations and entering into direct conflicts.” This would place us in a new world with entirely different rules. This case would require us to respond differently, and not via legal channels.
