Tue, Jun 28, 2022 page10

• Russia defaults on debt for first time since 1918

  • Bloomberg
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  Russia defaulted on its foreign-currency sovereign debt for the first time in a century, the culmination of ever-tougher Western sanctions that shut down payment routes to overseas creditors.

  For months, the country found paths around the penalties imposed after the Kremlin’s invasion of Ukraine.

  However, at the end of the day on Sunday, the grace period on about US$100 million of snared interest payments due on May 27 expired, a deadline considered an event of default if missed.

  

  People walk in front of St Basil’s Cathedral in Moscow on May 27.

  Photo: Reuters

  It is a grim marker in the country’s rapid transformation into an economic, financial and political outcast. The nation’s eurobonds have traded at distressed levels since the start of March, the central bank’s foreign reserves remain frozen and the biggest banks are severed from the global financial system.

  However, given the damage already done to the economy and markets, the default is also mostly symbolic for now, and matters little to Russians dealing with double-digit inflation and the worst economic contraction in years.

  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 twist its way out, it announced last week that it would switch to servicing its US$40 billion of outstanding sovereign debt in rubles, criticizing a force majeure situation it said was artificially manufactured by the West.

  “It’s a very, very rare thing, where a government that otherwise has the means is forced by an external government into default,” said Hassan Malik, senior sovereign analyst at Loomis Sayles & Company LP. “It’s going to be one of the big watershed defaults in history.”

  A formal declaration would usually come from ratings firms, but European sanctions led to them withdrawing ratings on Russian entities.

  According to the documents for the notes whose grace period expired on Sunday, holders can call one themselves if owners of 25 percent of the outstanding bonds agree that an “event of default” has occurred.

  With the final deadline passed, focus shifts to what investors do next.

  They do not need to act immediately and might choose to monitor the progress of the war in the hope that sanctions are eventually softened. Time might be on their side: the claims only become void three years on from the payment date, according to the bond documents.

  “Most bondholders will keep the wait-and-see approach,” said Takahide Kiuchi, an economist at Nomura Research Institute in Tokyo.

  Russian Minister of Finance Anton Siluanov dismissed the situation on Thursday as a “farce.”

  With billions of dollars a week still pouring into state coffers from energy exports, despite the grinding conflict in east Ukraine, he reiterated that the country has the means, and the will, to pay.

  “Anyone can declare whatever they like,” Siluanov said. “But anyone who understands what’s going on knows that this is in no way a default.”

  The Russian Ministry of Finance made its latest interest payments, equivalent to about US$400 million, under those rules on Thursday and Friday.

  However, none of the underlying bonds have terms that allow for settlement in the local currency.

  According to Siluanov, it makes little sense for creditors to seek a declaration of default through the courts because Russia has not waived its sovereign immunity and no foreign court would have jurisdiction.

  “If we ultimately get to the point where diplomatic assets are claimed, then this is tantamount to severing diplomatic ties and entering into direct conflict,” he said. “And this would put us in a different world with completely different rules. We would have to react differently in this case — and not through legal channels.”

  Foreigners held the equivalent of almost US$20 billion of Russia’s eurobonds as of the start of April.
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