Russian Finance Minister Anton Siluanov (seen here with Russian President Vladimir Putin in 2019) reportedly told the Russian newspaper Vedomosti that Moscow would continue to service foreign debts in rubles, but foreign Eurobond holders would have to open ruble and hard currency accounts in Russian banks to receive payments.
Mikhail Svetlov News Getty Images | Getty Images
Russia has entered its first major default on foreign debt in more than a century, after a grace period for two international bond payments expired on Sunday night.
Interest payments totaling $ 100 million were due on May 27 and are subject to a grace period that expired on Sunday night. Several media reported that bondholders did not receive the payments, after Russia’s attempts to pay in its ruble currency were blocked by international sanctions.
The The Kremlin has denied the claim that Russia is in default, and spokesman Dmitry Peskov reportedly said in a press call this morning that Russia paid bonds maturing in May, but that Euroclear blocked them due to Western sanctions, which is why the non-delivery of payments “is not [Russia’s] an issue.”
Extensive sanctions imposed by Western powers in response to Russia’s unprovoked invasion of Ukraine, along with countermeasures from Moscow, have effectively pushed the country out of the global financial system, but the Kremlin has so far managed to find ways to pay bondholders repeatedly.
However, attempts to circumvent the sanctions took a further blow in late May, when The U.S. Treasury Department has allowed the key exemption to expire. The waiver had previously allowed Russia’s central bank to process payments to dollar-denominated bondholders through U.S. and international banks, on a case-by-case basis.
Russian Finance Minister Anton Siluanov suggested it earlier this month Russia may have found another means of payment. Moscow has sent $ 100 million in rubles to its domestic settlement house, but the two bonds in question are not subject to a ruble clause that would allow the conversion of payments in domestic currency abroad.
Reuters reported early Mondayciting two sources, that some Taiwanese owners of Russian Eurobonds did not receive interest due on May 27, suggesting that Russia may be entering its first non-payment of foreign debt since 1918, despite having enough money and willingness to pay.
Siluanov reportedly told the Russian state news agency RIA Novosti that the payment blockade was not a true default, which usually comes as a result of unwillingness or inability to pay, and called the situation a “farce.”
Another $ 2 billion is due by the end of the year, although the contracts allow the payment of some bonds issued after 2014 in rubles or other alternative currencies.
Although there are signals that payments have indeed been suspended by international sanctions, it may take some time to confirm the default.
Decades of non-fulfillment?
Timothy Ash, senior strategist for emerging sovereign markets at Bluebay Asset Management, said while the default may not have a major direct impact on the market, Russian long-maturity government Eurobonds that traded at 130 cents before the invasion have already fallen to between 20 and 30 cents, and are now trading at default levels.
“Indeed, Russia has probably already paid for some ruble-denominated instruments it owes to foreigners in the weeks immediately following the invasion, although they withdrew their ratings, rating agencies could not call it non-payment,” Ash said in a note Monday.
“But this default is important because it will affect Russia’s rating, market access and financing costs in the years to come. And importantly, given that the US Treasury has forced Russia to default, Russia will only be able to get out of default when The U.S. Treasury is giving bondholders the green light to negotiate terms with Russian foreign creditors. ”
Ash suggested that this process could take years or decades, even in the event of a ceasefire that is not in line with a full peace agreement, meaning Russia’s access to foreign funding will remain limited and will face higher borrowing costs for a long time to come.
He argued that Russian alternative sources of foreign financing outside the West, such as Chinese banks, would also be reluctant to look beyond the given headlines.
“If they are willing to take the risks of secondary sanctions – which they have not so far – and still lend to Russia, they will add a huge risk premium to credit rates because of the possibility of somehow dragging them into future debt restructuring negotiations,” Ash said.
“It just makes it very difficult to lend to Russia, so people will avoid it. And that means lower investment, lower growth, lower living standards, the flight of capital and people (brain drain) and the vicious circle of the Russian economy’s decline.”
Russia has so far managed to conduct successful capital controls that have supported the ruble currency and continued to generate significant revenues from energy exports as a result of rising oil and gas prices.
However, Ash suggested that the carbon transition and accelerated Western diversification away from Russian energy and goods means that this “golden goose is cooking two to three years later”.
“So, in two to three years, Russia is facing a collapse in export receipts, with almost no access to international financing due to sanctions and non-compliance,” he said.
“Meanwhile, since most of Putin’s army has been destroyed in Ukraine, he will fight to fund the military reconstruction he desperately wants to achieve given his desire to maintain some kind of parity with NATO.”
The resulting diversion of resources from spending to military investment, Ash argues, could lead to the prospect of “decay and decay” of Putin’s Russia.
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