Russia will of course default on its debt for the first time since 1998 with the passage of a deadline for overdue interest payments, after Western sanctions prevented Moscow from transferring cash to creditors.
About $100 million in interest on Russian government bonds came due Sunday night with no sign of payment, marking the end of a 30-day grace period during which the country sought to avoid defaulting altogether.
Russia is awash in foreign currency thanks to its huge oil and gas revenues and has repeatedly said it wants to keep paying its debts, accusing Western governments of trying to force the country into “fake” defaults.
But escalating sanctions followed Invasion of Ukraine frozen the country out of the global financial system, and the US treasury last month close a punishment hole that allowed American investors to temporarily receive interest payments from Russia, setting the clock to a grace period.
Under the terms of the bond, if the holder does not receive payment by the end of the grace period, Russia will become insolvent, the first time Moscow has officially extended its debts since the end of the grace period. Russian financial crisis of 1998.
Investors said there was no sign of interest payments coming, nor did Russia show any attempt to find a new payment route at the last minute after efforts. earlier to give dollars to unsuccessful investors. Instead, Vladimir Putin last week signed a decree setting out a new mechanism for making upcoming debt payments in rubles, a step equivalent to the possibility of default under the terms of most loans. Russia’s foreign debt.
As markets have for months seen default as inevitable, the immediate impact of Sunday’s deadline has been largely symbolic. Russian bonds have for months been trading at levels suggesting a default is a formality, after prices plummeted after Western leaders responded to the Ukraine invasion with unprecedented financial sanctions. yes, including freezing a large part of Moscow’s foreign currency reserves.
Markets showed little reaction to the possibility of a default on Monday, with a bond maturing in 2036 – one of the bonds that pay missed interest – trading at 20 cents on the dollar.
Foreign investors owned about half of Moscow’s roughly $40 billion in foreign bonds – a relatively modest amount of debt for an economy of Russia’s size – prior to the invasion, and did recorded large losses on these holdings.
“It’s priced pretty high right now,” said Paul McNamara, head of emerging markets bond funds at GAM.
A default could make it difficult for Russia to return to the bond market in the future and increase borrowing costs when it occurs. However, the sale of Russia’s new foreign currency debt has been a distant prospect given the severity of Western sanctions and the country’s status with war still raging in Ukraine.
“I think it’s an interesting demonstration of what the Americans can do if they want to, but I don’t think it has a huge economic impact on Russia,” McNamara said.
Russia’s currency has rallied after the invasion and on Monday is up about 40% against the dollar for the year so far. However, investors argue that this increase reflects at least part of the effectiveness of sanctions in cutting off Russia’s access to imports*.
The passage of the bond term comes as Western countries seek to increase pressure on Moscow. G7 leaders meeting in Europe on Sunday sought an agreement to impose a “price cap” on Russian oil as part of an effort to limit Moscow’s ability to finance the war in Ukraine. Ukrainian President Volodymyr Zelenskyy is expected to join the summit via video link on Monday.
Russia’s Western creditors now need to decide what to do next.
Investors can “accelerate” repayment, demanding they get their money back immediately if 25% of default bondholders vote to do so. That would trigger provisions that would allow accelerating the rest of Russia’s foreign debt.
However, some owners may prefer to wait as sanctions are also likely to complicate any attempt to pursue their claims against Russia with legal action.
“I’m not sure what bondholders get by speeding up and trying to sue,” said a hedge fund manager with Russian debt, adding that any Russian offshore assets Investors who may try to pursue in court are all frozen by the sanctions and thus out of reach. “Just waiting makes more sense.”
* This story has been revised to accommodate the historical change in the ruble against the dollar
