Explanation: Can Russia pay its creditors, and what if not?

Russian ruble banknote sits on top of US dollar banknotes in this illustration taken February 24, 2022. REUTERS/Dado Ruvic/Illustration

Join now for FREE unlimited access to Reuters.com

Register

March 15 (Reuters) – Russia is due to pay $117 million in interest on two dollar-denominated sovereign bonds on Wednesday – the first such payments since its invasion of Ukraine that triggered a series of sanctions from Western capitals and countermeasures from Moscow.

Russia’s Finance Ministry said on Monday it had sent an order to a correspondent bank for the payment of coupons on $117.2 million Eurobonds that are due on Wednesday. Read more

The diplomatic stalemate and economic brakes have raised questions about if and how Russia will make the payment, raising the specter of its first major foreign debt default since 1917, when the Bolsheviks failed to acknowledge the Tsarist debt to the aftermath of the revolution.

Join now for FREE unlimited access to Reuters.com

Register

Here’s what we know and don’t know about Russian debt and its repayment:

HOW MUCH DOES RUSSIA OWER IN HARD CURRENCY BONDS?

Russia has 15 international bonds with a face value of about $40 billion outstanding, about half of which are held by international investors.

The March 16 coupons are the first of several, with another $615 million due over the rest 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 mixture of terms and deeds. Bonds sold after Russia was sanctioned for its 2014 annexation of Crimea contain a provision for payments in alternative currencies. For bonds listed after 2018, the ruble is listed as an alternative currency option.

The Wednesday coupon payment bonds were listed in 2013 and are to be paid in US dollars, with Citi as paying agent. According to the prospectus of the bonds, the payment in another currency would only be effective after the beneficiaries had exchanged this dollar amount for dollars, and at the dollar amount recoverable on the open market.

Citi did not immediately respond to a request for comment.

WILL MOSCOW PAY?

Sanctions have been severe, in particular the freezing of central bank foreign exchange reserves, with Moscow initially balking at the prospect of sending scarce hard currency to foreign investors.

A March 5 presidential decree announced that Russian debtors had the right to pay foreign creditors in rubles and by placing their funds in a Type C account with the national depositary. However, the central bank and the Ministry of Finance can make exceptions.

Later statements have been more nuanced and apparently allow hard currency payments. The Ministry of Finance said in a report on Monday that she had approved a temporary procedure for making foreign currency payments and that Russia would fulfill its obligations “in due time and in full”.

However, if the foreign banks do not execute the payments, Russia could withdraw the funds and pay them in rubles to an account with the national depositary.

WILL INVESTORS BE ABLE TO RECEIVE THE MONEY?

Sanctions on both sides mean it has become more complicated for Russia to transfer the funds, but also for foreign investors to receive them.

The United States Office of Foreign Assets Control (OFAC) has released general license 9A of March 2 which authorizes transactions for U.S. persons regarding “the receipt of interest, dividends, or payments when due in connection with debt or equity” issued by the Russian Ministry of Finance, the central bank or the national wealth fund. However, this exemption expires on May 25, with Russia having to pay almost $2 billion on its external sovereign bonds after this deadline and until the end of the year.

WHAT IS THE PROSPECT OF A RUSSIAN DEFECT?

A default on Russia’s external debt seemed unthinkable, with its international bonds trading above par until February.

The harsh penalties changed all that and now the bonds are hovering at distressed levels, some as low as a tenth of their face value.

Most payments due – like the one 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 of Russia’s other external bonds, which have alternative payment provisions in the fine print, the coupons due Wednesday must be paid in US dollars.

Failure to pay them in full or pay in another currency would result in default by the end of the grace period, analysts said.

WHAT WILL BE THE CONSEQUENCES OF A DEFAULT?

Defaulting countries do not have access to international capital markets, although under current restrictions Russia is shut out of the markets anyway.

However, a default could have far-reaching consequences.

This could trigger Russian debt default insurance policies known as Credit Default Swaps (CDS) that investors take out for this kind of situation. Investment bank JPMorgan estimates that there are around $6 billion worth of CDS outstanding that should be paid out.

Moreover, it is not just international asset managers who are exposed to Russia’s external debt. “Many Russian investors bought this paper through their accounts at Western banks,” said Evgeny Suvorov, Russia-based economist at CentroCredit Bank. “There is a great suspicion that it is specifically Russian investors who are the main bondholders of sovereign external debt.”

Russian banks could also struggle with bonds forming part of their capital buffers.

Being under the jurisdiction of a defaulting sovereign adds pressure on Russian companies, which have frequently used international capital markets to raise funding and have nearly $100 billion in hard currency obligations. in circulation.

Join now for FREE unlimited access to Reuters.com

Register

Reuters reporting; Editing by Nick Macfie

Our standards: The Thomson Reuters Trust Principles.

Comments are closed.