Russia could be defaulted this Wednesday; understand

Russia faces its first round of bond payments on Wednesday amid the threat of default, with its overseas assets frozen by international sanctions.

The country is due to repay US$117 million (R$600 million) of two euro-denominated bonds, the first payment in a series scheduled for March and April.

But now, in reprisal for the Russian military operation in Ukraine, nearly $300 billion of Russia’s reserves are frozen in Western banks.

On Monday (14), the finance ministry announced that it had issued a “payment order to the correspondent bank to pay the amount of US$ 117.2 million”.

Earlier, Russian Finance Minister Anton Siluanov had threatened to pay off debts in rubles.

“Statements that Russia cannot meet its public debt obligations do not correspond to reality,” the finance minister said on Monday (14).

“The freezing of foreign currency accounts of the Bank of Russia and the government can be considered as the desire of foreign countries to provoke an artificial default,” he added.

If Russia complies with the threat to pay in rubles, a 30-day period will begin after which the country will be declared in default on its foreign debt, for the first time since 1918, when Lenin defaulted on the country’s obligations.

However, there is some ambiguity regarding the first expiration date of March 16, as the situation is unprecedented.

JPMorgan analysts believe that payments should be possible.

The US Treasury specifies that interest payments can be made until May 25, 2022 in the case of Americans, on bonds issued before March 1, 2022 by the Russian Central Bank, a Russian sovereign wealth fund or the Ministry of Finance. .

After the date, they will need authorization to continue receiving these payments.

Western sanctions have paralyzed part of the Russian banking and financial system and caused the ruble to depreciate sharply.

A default automatically cuts off a state’s access to financial markets and jeopardizes its profitability for years.

Understand what happens if Russia fails to pay its creditors

• How much does Russia owe in hard currency bonds?

Russia has 15 international bonds with a value of around US$40 billion (R$205 billion) outstanding, about half of which are held by international investors.

Bonds issued after Russia was sanctioned by the annexation of Crimea in 2014 contain a provision allowing payments in an alternative currency. For bonds listed after 2018, the ruble is listed as an alternative currency option.

The bonds linked to this Wednesday’s coupon payment (16) were listed in 2013 and must be paid in dollars, with Citi as the paying agent.

A March 5 presidential decree announced that Russian debtors have the right to pay foreign creditors in rubles.

But the Ministry of Finance said in a statement on Monday that it had approved a temporary procedure for making payments in foreign currency and that Russia would fulfill the obligations “in a timely manner and in full.”

• Can investors get the money?

The U.S. Office of Foreign Assets Control issued a general license on March 2 that authorizes transactions for U.S. persons in connection with “receipt of interest, dividends, or maturity payments in connection with debt or equity” issued by the US Department of Finance. Russia, its central bank or its Treasury. However, this runs out on May 25th.

Russia owes payment of almost 2 billion (R$ 10 billion) in its external sovereign bonds after that period and until the end of the year.

• What would be the consequences of a default?

Defaulting countries do not have access to international capital markets, although given current restrictions, Russia is excluded anyway.

However, a default can have far-reaching consequences.

This could trigger the payment of CDS (Credit Default Swaps), a protection against defaults that investors hire for this type of situation. Investment bank JPMorgan estimates that there are around US$6 billion (R$30 billion) in outstanding CDS that would need to be paid.

Furthermore, it is not just international asset managers who are exposed to Russia’s external debt. “Many Russian investors bought this paper through their accounts with Western banks,” said Evgeny Suvorov, economist at CentroCredit Bank.