Standard & Poor’s ready to brand Russia with the initials ‘SD’. The acronym refers to “selective default,” a type of partial bankruptcy triggered when the debtor fails to meet some of their obligations. The US agency has downgraded the rating of Russian government bonds (both foreign and local) to “CC” for now, but warned that both ratings remain “under watch with negative implications”. In practice, further retrocessions cannot be ruled out.
S&P’s rejection fuels mystery over Moscow’s actual payment of a $117 million coupon that expired last Wednesday. Although first Bloomberg and then the Wall Street Journal revealed that the payment was made, with the money already deposited in Citigroup accounts and then handed over to bondholders thanks to a sanctions waiver granted by the US Treasury Department’s Office of Foreign Assets Control. The exemption would allow the Bank of Russia and the Russian Treasury to meet their dollar-denominated financial obligations until May 25. After that, a specific license approved by the Ministry of Finance is required to continue receiving interest, dividends, or payments of maturity on the Kremlin’s debt. Neither the Department, led by Janet Yellen, nor Citi confirmed the news.
However, Moscow’s willingness to repay its international debt is likely to be tested soon. The equivalent of $615 million in interest expires on March 31, while the real solvency test could come on April 4, the date when a $2 billion bond has to be redeemed. A possible tightening of the punitive measures against Putin could persuade Moscow to force the already threatened hand to pay back the debt in rubles. Even at the cost of default, since bonds issued before 2014 are not redeemable in a currency other than the currency of issue.
EU Economy Commissioner Paolo Gentiloni stressed yesterday that “the path of sanctions is not closed. From the Commission’s point of view, the basic rule is that nothing is off the table. But we must modulate the sanctions and know that it is about using methods that can harm the Russian economy more than the European economy. This suggests that Russian oil and gas will remain off the list given the old continent’s dependence on Russian energy supplies.
Although Gentiloni has ruled out that stagnation is on the horizon, should the economic scenario deteriorate “a systemic response will be required”. And that answer could put the issue of Eurobonds back at the center of the debate to cover energy costs and fund defense spending. However, the proposal, launched by French President Emmanuel Macron with the discreet backing of Mario Draghi, has so far met resistance in Germany and northern countries. “I am not excluding issues of this nature from the horizon of future debates,” said the former prime minister, “even if they are not currently being discussed and have not been raised at the last summits”. Meanwhile, Brussels has almost completed the state aid exemption regime. It will be presented next week and, as expected by Gentiloni, will be “more limited than that for the pandemic and aimed at companies that have been particularly affected”, particularly energy-intensive ones and those that have suffered the most from increases in the price of materials.