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Photo: Andrey Rudakov / Bloomberg – |
Russia has defaulted on its foreign currency government debt for the first time in a century – the culmination of tougher Western sanctions that have cut off payment to foreign creditors, Bloomberg reports.
For months, the country has been finding ways to circumvent sanctions imposed by the Kremlin’s invasion of Ukraine. But at the end of the day on Sunday, the grace period of about $ 100 million for interest payments due on May 27 expired – a deadline that is considered default if missed.
This is a grim marker in the country’s rapid transformation into an economic, financial and political isolation. Since the beginning of March, the country’s Eurobonds have been trading at troubled levels, the central bank’s foreign exchange reserves have remained frozen, and the largest banks have been cut off from the global financial system.
But given the damage already done to the economy and markets, the default so far is largely symbolic and of little importance to Russians, who are facing double-digit inflation and the worst economic downturn in years.
Russia opposed the default, saying it had the means to cover all the bills and was forced not to pay them. Trying to escape, she announced last week that she would move to service her $ 40 billion in public debt, criticizing the “force majeure” situation she said was artificially created by the West.
“This is a very, very rare phenomenon in which a government that otherwise has the means is forced by a foreign government to declare bankruptcy,” said Hassan Malik, a senior sovereign analyst at Loomis Sayles & Company LP. the biggest defaults in history. “
The official declaration is usually given by rating companies, but European sanctions have forced them to withdraw ratings on Russian entities. According to the documents for the bonds, whose grace period expired on Sunday, their holders can cause a default if the owners of 25% of the bonds in circulation agree that a “case of default” has occurred.
Once the deadline expires, the focus shifts to what investors should do next.
They do not need to act immediately and can choose to monitor the course of the war in the hope that sanctions will eventually be eased. Time may be on their side: according to the bond documents, the receivables become invalid only three years after the date of payment.
“Most bondholders will keep the wait-and-see approach,” said Takahide Kiuchi, an economist at the Nomura Research Institute in Tokyo.
During the financial crisis in Russia and the collapse of the ruble in 1998, the government of President Boris Yeltsin failed to pay off $ 40 billion of its local debt. The last time Russia became insolvent vis-à-vis its foreign creditors was more than a century ago, when in 1918 the Bolsheviks under Vladimir Lenin relinquished the country’s stunning tsarist debt.
According to some estimates, it has reached one trillion dollars in today’s money, says Malik from Loomis Sayles, who is also the author of the book “Bankers and Bolsheviks: International Finance and the Russian Revolution”.
By comparison, at the beginning of April, foreigners owned the equivalent of almost $ 20 billion in Russian Eurobonds.
“Is it justified to say, ‘Oh, well, sanctions have prevented me from making payments, so it’s not my fault?'” Malik said.
“The broader issue is that the sanctions themselves were a response to action by the sovereign entity,” he said, referring to the invasion of Ukraine. “And I think history will appreciate that in the end.”
On Thursday, Russian Finance Minister Anton Siluanov dismissed the situation as a “farce.”
With billions of dollars a week still flowing into the state treasury from energy exports, despite the conflict in eastern Ukraine, he reiterated that the country has the means and the will to pay.
“Everyone can declare what they want,” Siluanov said. “But anyone who understands what is happening knows that this is by no means a default.”
His comments were dictated by the grace period, which expired on Sunday. The 30-day window was triggered when investors failed to receive due coupon payments on dollar and euro-denominated bonds on May 27.
The money fell into a trap after the US Treasury Department allowed the sanctions to expire, removing the exception that allowed US bondholders to receive payments from the Russian sovereign. One week later, the European Union also imposed sanctions on Russia’s payment agent, the National Depository for Payments.
In response, Vladimir Putin introduced new provisions according to which Russia’s obligations on foreign currency bonds are fulfilled after the corresponding amount in rubles is transferred to the local paying agent.
The Treasury Department made its latest interest payments, amounting to about $ 400m, under those rules on Thursday and Friday. However, none of the underlying bonds has conditions that allow payment in local currency.
It is unclear whether investors will use the new instrument and whether existing sanctions will allow them to repatriate the money at all.
According to Siluanov, it is pointless for creditors to seek insolvency in court, as Russia has not waived its sovereign immunity and no foreign court would have jurisdiction.
“If, in the end, there comes a time when claims for diplomatic assets are made, it is tantamount to severing diplomatic ties and entering into direct conflict,” he said. “And that will put us in another world with completely different rules. In this case, we will have to react differently – and not in a legal way. “
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