The Russian state will not pay foreign bondholders a bond coupon due for the first time since 1998.
Holders of government bonds denominated in rubles maturing in 2024 must receive payment on Thursday for a coupon due the previous day. Investors in Europe who own the bond say they have not received it or no notifications that it is on the way.
Russia’s national settlement depository said the finance ministry had sent interest rates as usual. Under normal circumstances, the depositary will transfer it to the accounts of the bondholders with a payment scheduled for delivery the next day. But because of Russia’s revenge against Western sanctions, the money is stuck in a congested financial infrastructure, paving the way for Russia’s first potential bankruptcy in more than two decades.
The central bank blocked depositors and registrars from making payments to foreign customers earlier this week. They are part of the system that connects issuers and debtors. The bond issuer can make a payment to the accounting system, but the depositary is prohibited from sending it to foreign clients, the central bank said in a statement.
“They clearly see this as an economic war, and this is their way of attacking foreigners,” said Paul McNamara, a bond fund manager in emerging markets at GAM.
This move is part of a wide range of capital control measures adopted after the invasion of Ukraine. The measures include a ban on foreign exchange transfers and a ban on foreign investors selling assets. Investors have begun recording the value of their Russian assets, from managers of non-tradable assets to BP Plc’s exit from its stake in Moscow-based Rosneft, which it says could lead to a loss of $ 25 billion.
The last time Russia failed to pay its bondholders was in August 1998, when falling oil prices, low tax collection and delayed reforms forced Russia to pay off its debt and devalue the ruble.
The standard bond practice is a 30-day grace period after the payment is missed, according to Clearstream securities settlement provider and debt capital lawyers. If the bondholders do not receive it by the end of the period, default may be requested. The 6.5% coupon payment is estimated at 22 billion rubles, or $ 210 million.
“If you own foreign bonds and hold Russia’s domestic debt, you may not be able to do much in the end. You can try to enforce the terms of the bonds, but I suspect it will be difficult in practice, “said Jamie Durham, a partner with a focus on debt capital markets at Allen & Overy.
Even if the Russian Ministry of Finance technically paid for the coupon, “from the point of view of the bondholders, they were not paid,” Mr Durham said.
Russia was in its strongest financial position years before the invasion. After bankruptcy in 1998, Russia was slowly building goodwill with foreign investors. The central bank has taken a strong stance in curbing inflation and amassed $ 630 billion in international reserves, thanks to a current account surplus backed by high oil prices. Rating companies have raised Russia in the desired category of investment class, which shows a low probability of default.
Most of Russia’s local currency bonds are held in the domestic market, and these bonds can still be redeemed. Foreign ownership of the Russian local currency bond market was below 20% in February, according to the Russian Central Bank. Their assets were valued at nearly 3 trillion rubles at the end of January, according to the Institute of International Finance. That’s about $ 25 billion at Thursday’s exchange rate.
In terms of the wider universe of emerging market bonds, Russia was a small but not insignificant player. It accounted for about 6% of JPMorgan Chase & Co.’s popular bond index. in local currency to emerging markets last week.
The blow from Western sanctions has been quick, with all three rating companies downgrading their sovereign status to rubbish over the past five days. Moody’s and Fitch lowered it by six degrees on Wednesday.
Fitch reduced it to B, which means he sees a significant risk of default. The company cited uncertainty over the Russian government’s willingness to pay off debt.
Rating companies evaluate the borrower by both their ability and their willingness to pay their debts. In the case of Russia, if it fails, it will be due to choice rather than insufficient funds.