Russian President Vladimir Putin (REUTERS)
Russia’s first default in a century already seems almost inevitable after another brutal week for the country’s finances. First, the Treasury Department suspended payments of dollar debts from Russia’s accounts in US banks, tightening its restrictions on the country. Then, when an attempted foreign currency payment was blocked, Russia violated the terms of two bonds by paying investors in rubles instead of dollars.
This brought the countdown clock a little closer to the default. Since Russia invaded Ukraine in February, the United States and other countries have cracked down on banks, corporations and oligarchs. The freeze on the central bank’s foreign exchange reserves cut Russia off from the global financial system and within days made it the world’s most sanctioned nation.
With Vladimir Putin’s government hampered by asset freezes and branded a pariah politically, economically and financially by Western countries, there has been speculation that Russia may only be able to avoid defaulting for so long. The country’s bonds are already trading in risky territory, with debt insurance now showing a near 90% default probability this year.according to the latest figures from ICE Data Services.
The last time Russia defaulted was in 1998, but because of domestic debt. The last foreign debt was after the 1917 revolution. S&P said Saturday it had declared Russia a selective default after it used rubles to make a dollar-denominated bond payment on April 4.
The dollar bonds, paid for in rubles this week, have a 30-day grace period, giving Finance Minister Anton Siluanov time to find a solution or defend his argument that it’s not a default because technically it is so is. He said this week that rubles transferred in lieu of dollars can be exchanged for creditors once the reserve freeze is eased.
“Western countries are trying by all means to bring Russia into default,” Siluanov told the state news service TASS this week. He also said Russia will use “other mechanisms” to make the payments.
In the meantime, the financial world is waiting for an official decision on whether there is a default.
But it’s unclear where that decision will come from. After a series of cuts that have pushed Russia into “junk” status, rating firms have stopped reporting as the EU banned the country from providing ratings. Moody’s Investors Service and Fitch ratings have already withdrawn, S&P Global said in its statement on Saturday that it would comply with the EU’s April 15 ban, and all of its ratings for Russia were subsequently withdrawn.
There is also the Credit Derivatives Determinations Committee, made up of buying and selling firms who vote on whether a credit event has occurred and whether default swaps have been triggered. The committee is already examining a question about the possible default of the state railway operator, which failed to pay the interest on the bonds on time in March.
“If Russia fails to organize a payment method for bondholders within the grace period and the dollars don’t reach the accounts, then this is a default, the CDS will be activated.”said Lutz Roehmeyer, chief investment officer at Berlin-based Capitulum Asset Management.
Since the February 24 invasion and the sweeping sanctions that followed Russian debtors had difficulty getting funds to creditors in a timely manner. Bank compliance departments have scrutinized payments with additional controls. Initially, the disruption was more felt in the corporate sector, with many companies failing to pay their bonuses on time. This week, Sovcombank PJSC became the first bank to declare that it will not pay out foreign currency bonds.
By blocking access to bank accounts, he torpedoed a Treasury Ministry waiver of sanctions that had allowed bond payments from Russian accounts abroad despite a freeze on central bank reserves.
The decision to block this payment method came after information via the atrocities committed by Russia in the Ukrainian city of Bucha on the weekend.
Infobae toured Bucha after the massacre (Photo: Franco Fafasuli)
The move was intended to force Russia to rely on domestic sources of funding or foreign exchange earnings from oil and gas exports, reducing the government’s funds at its disposal for an invasion that has razed cities, killed thousands and displaced 11 million.
economic impact
The bond market drama is playing out against a distorted economic backdrop. On the one hand, the economy plunges into a deep recession. On the other hand, capital controls have underpinned an extraordinary rally in the ruble, which has allowed the central bank to cut interest rates by a surprising 300 basis points this week.
Though western countries are rushing to reduce their reliance on Russian commodities, the country still makes billions of dollars from oil and gas exports, leaving it with plenty of cash for now.
Thanks to this revenue, the government says it has funds to pay creditors. He has attributed the payment problems to the central bank’s asset freeze and the uncertainty surrounding it.
According to Tim Ash, emerging markets strategist at Bluebay Asset Management, There will be no quick fix for Russia because sanctions remain in place and no one wants to do business there.
“Putin has crossed a line with his actions in Ukraine,” he said. “Russia will default for maybe a decade. This means no access to the international capital markets, very high borrowing costs – also for the Chinese – no investments, no growth and a low standard of living. It is a terrible scenario for Russia and the Russians.”
(c) 2022, Bloomberg
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Russia is on the brink of default: its debt has been downgraded to “selective default” by the agency S&P. Putin’s war is causing a tsunami of inflation, fuel increases and civil unrest