Russia slips into historic lapse as sanctions next step

Russia defaulted on its external sovereign bonds for the first time in a century, the culmination of sometimes tough Western sanctions that shut down payment routes to foreign creditors.

For months, Russia had searched for a way around the penalties imposed after the invasion of the Kremlin. Ukraine, But at the end of the day on Sunday, May 27, the grace period for nearly $100 million of stranded interest payments due, a deadline, is considered an “event of default.”

The route to this point has been far from normal, as Russia has the resources to pay its bills – and tried to do so – but was blocked by sanctions. Those restrictions also mean a lot of uncertainty about what will happen next, and how investors can get their money.

“With Russia benefiting from the high price of its energy exports, it clearly has both the means and the willingness to pay back its foreign debt,” said Giles Coglan, chief analyst at HYCM Group. It is “a default in a technical sense, so many investors may be willing to wait it out.”

Moody’s Investors Service said missed payments constitute a default under its definition and warned that the government could also default on future bond payments. Moody’s and other valuation firms no longer rate Russia because of sanctions.

Given the damage already done to the economy and markets, the default is also mostly symbolic for now, and means little for the Russians to deal with in double digits. inflation And the worst economic contraction in years. But nonetheless, it is a grim marker in the country’s rapid change in economic, financial and political exclusion. The country’s Eurobonds have traded at distressed levels since early March, with central bank foreign reserves frozen, and the largest banks cut off from the global financial system.

Russian sovereign bonds have been trading at distressed levels since March

Russia has pushed back against the default designation, saying it has the funds to cover any bills and has been forced into non-payment.

As it tried to turn its way, it announced last week that it would switch to servicing its $40 billion outstanding sovereign debt in rubles, criticizing an “unforeseen” situation that it said artificially was built by the West.

Russia’s last sovereign default occurred in 1998, during the country’s financial collapse and the devaluation of the ruble.

At the time, Russia refrained from defaulting on its foreign Eurobonds, although President Boris Yeltsin’s government refused the $40 billion ruble-denominated loan, and refrained from making payments on dollar notes issued by state-owned Veneeshkonbank. Missed too.

While those bonds were issued in 1997 following an agreement with the so-called London Club to restructure Soviet-era debt held by Western banks, they belonged to Venechekonombank instead of the Russian Federation, according to a paper published by the International Monetary Fund. Technically there were obligations. , In May 1999 the government also defaulted on a Soviet-era dollar bond known as the Minfin III, which was issued domestically but was widely held by foreign investors.

While the country restructured some of its debt, which at the time did not include its Eurobonds, according to sovereign debt attorneys Lee Bouchet and Elena Daly, who advised Russia during the 1990s restructuring. “Minfins, while denominated in dollars, were governed by Russian law and could therefore be viewed as an internal debt,” he said.

The last time Russia fell into direct default compared to its foreign creditors was more than a century ago when the Bolsheviks under Vladimir Lenin rejected the country’s staggering Tsarist-era debt load in 1918.

By some measures, it moved closer to a trillion dollars in today’s money, according to Hassan Malik, senior sovereign analyst at Loomis Salles & Co. LP.

By comparison, foreigners had the equivalent of Russia’s Eurobonds worth about $20 billion as of early April.

A formal default declaration usually comes from rating firms, but European sanctions have caused them to withdraw ratings on Russian entities. According to the bond documents, holders can call themselves if the owners of 25% of the outstanding bonds agree that an “event of default” has occurred.

Finance Minister Anton Siluanov on Thursday dismissed the situation as a “spectacle”.

He also said that there is no point for creditors to declare default through the courts as Russia has not waived its sovereign immunity, and no foreign court will have jurisdiction.

“If we eventually get to the point where diplomatic property is claimed, it is tantamount to breaking off diplomatic ties and entering a direct conflict,” he said. “And it would put us in a different world with completely different rules. We would have to respond differently to this matter – not by legal means.”

The 30-day grace period began when investors failed to receive coupon payments due to dollar- and euro-denominated bonds on May 27. Bondholders have time to assess the situation: Claims become void for only three years from the date of payment. for bond documents.

With payments blocked, Vladimir Putin introduced new rules that mandate that Russia’s obligations on foreign currency bonds are met once the appropriate amount in rubles is transferred to a local payment agent.

The finance ministry made its latest interest payments under those rules on Thursday and Friday, the equivalent of about $400 million. However, none of the underlying bonds have terms that allow settlement in the local currency.

As of now, it is not clear whether investors will use the new instrument and whether the current restrictions will also allow them to return the funds.

“Is it fair to say: ‘Oh well, sanctions kept me from paying, so it’s not my fault’?” Malik, who is also the author of ‘Bankers and Bolsheviks: International Finance and the Russian Revolution’.

“The broader issue is that the sanctions were a reaction to an action on the part of the sovereign entity itself,” he said, referring to the invasion of Ukraine. “And I think history will judge it in the light of the latter.”