FILE PHOTO: The Russian ruble banknote is placed on top of U.S. dollar banknotes in this February 24, 2022 illustration. REUTERS/Dado Ruvic/Illustration
March 15, 2022
(Reuters) – Russia will on Wednesday pay $117 million in interest on two dollar-denominated government bonds — the first such payments since its invasion of Ukraine, which sparked a spate of sanctions from Western capitals and countermeasures from Moscow.
Russia’s Treasury Ministry said on Monday it had sent an instruction to a correspondent bank to pay coupons on $117.2 million in Eurobonds due Wednesday.
The diplomatic standoff and economic constraints have raised questions about whether and how Russia will make the payment, raising the specter of its first major foreign debt default since 1917, when the Bolsheviks failed to recognize the post-revolution Tsarist debt.
Here’s what we do and don’t know about Russia’s debt and its repayment:
HOW MUCH DOES RUSSIA OBE IN HARD CURRENCY BONDS?
Russia has 15 international bonds outstanding with a face value of around $40 billion, about half of which are held by international investors.
The March 16 coupons are the first of several, with another $615 million due for the remainder of the month. The first principal payment is due on April 4 when a $2 billion bond matures.
The bonds themselves were issued with a mix of conditions and debentures. Bonds sold after Russia was sanctioned for its 2014 annexation of Crimea include a provision for alternative currency payments. For bonds listed after 2018, the ruble is listed as an alternative currency option.
The bonds associated with Wednesday’s coupon payment were listed in 2013 and are payable in US dollars, with Citi as the paying agent. Pursuant to the prospectus, a payment in a different currency would only take effect after the recipients had converted that currency amount into dollars, and at the dollar amount obtainable in the open market.
Citi did not immediately respond to a request for comment.
WILL MOSCOW PAY?
Sanctions have hit hard, notably the freeze on the central bank’s foreign reserves, with Moscow initially shying away from the prospect of sending scarce hard currencies to foreign investors.
A March 5 presidential decree announced that Russian debtors have the right to pay foreign creditors in rubles and deposit their funds in a Type C account with the national depositary. However, the Central Bank and Treasury may make exceptions.
Subsequent explanations were more nuanced and appeared to allow for hard currency payments. The Treasury Ministry said in a statement Monday that it had approved a temporary procedure for foreign exchange payments and that Russia would honor its obligations “timely and fully.”
However, if foreign banks fail to make the payments, Russia could withdraw the funds and deposit them in rubles into an account with the national custodian.
WILL INVESTORS GET THE MONEY?
Sanctions from both sides have made it harder for Russia to move the funds, but also for foreign investors to receive them.
The US Office of Foreign Assets Control (OFAC) on March 2 issued General License 9A authorizing transactions for US persons relating to “the receipt of interest, dividends or payments of maturity in connection with debt or equity” authorized by the Russian Ministry of Finance was issued. Central Bank or National Fund. However, that exemption expires on May 25, as after that deadline and through to the end of the year, Russia will have to pay nearly $2 billion on its external government bonds.
WHAT IS THE CHANCE OF A RUSSIAN DEFAULT?
A default on Russia’s external debt seemed unthinkable as its international bonds traded above par well into February.
Harsh sanctions have changed all that and now bonds are trading at distressed levels, some at barely a tenth of their face value.
Most payments due – like those on Wednesday – have a 30-day grace period during which Russia has time to make the payment. Some issues have a 15-day grace period. Unlike some other Russian foreign bonds, which have alternative payment terms in the fine print, coupons due Wednesday must be paid in US dollars.
Failure to pay in full or in a different currency would result in a default at the end of the grace period, according to analysts.
WHAT WOULD BE THE CONSEQUENCES OF A FAILURE?
Countries that have defaulted do not have access to international capital markets, although Russia is locked out of the markets anyway given the current restrictions.
However, a default could have far-reaching consequences.
This could trigger Russian credit default insurance policies known as credit default swaps (CDS) that investors take out for this type of situation. Investment bank JPMorgan estimates that there are around $6 billion worth of CDS outstanding that would need to be paid out.
Moreover, not only international wealth managers are exposed to Russia’s external debt. “Many Russian investors bought this paper through their accounts in Western banks,” said Evgeny Suvorov, Russia-based economist at CentroCredit Bank. “There is a strong suspicion that it is Russian investors in particular who are the main bondholders of government bonds abroad.”
Russian banks could also run into trouble with the bonds that make up part of their capital buffers.
Being under the jurisdiction of a defaulting state is increasing the pressure on Russian companies, which have often used international capital markets to raise funds and have nearly $100 billion in outstanding hard-currency bonds.
(Reported by Reuters; Edited by Nick Macfie)
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