Russia default looms as dollar bond payment deadline approaches | Russia

Russia faced a crucial bond payment on Wednesday that could lead the sanctioned country to default for the first time since 1998, and its first major international default since the Bolshevik Revolution a year ago. century.

Moscow was to make $117m (£89.4m) in interest payments, or coupons, to investors holding $2-denominated bonds. But with much of its foreign exchange reserves frozen by international sanctions, it may be unable to pay.

This could pave the way for a historic default, after a 30-day grace period, which would add to intense pressure on the Russian economy.

“The onset of war, Western sanctions, the exodus of international conglomerates and plummeting investor confidence led to the downfall of Russia with its currency, financial system and economy in general in shambles” , said Victoria Scholar, chief investment officer at Interactive. Investor. “Although Russia technically has a 30-day grace period before an official default, a complete collapse is almost inevitable.”

Russian Finance Minister Anton Siluanov has accused the West of trying to engineer an “artificial default” by freezing access to the Bank of Russia’s foreign exchange reserves held by other major central banks.

Moscow said it could pay holders of international bonds in rubles, if it was unable to repay its debts in the currencies in which they were issued. She argued that this would mean she was honoring the payment.

“Is this a defect? From Russia’s point of view, we are fulfilling our obligations,” Siluanov told state television on Monday.

The Russian Finance Ministry announced earlier this week that it had sent a payment order for $117.2 million, but that Western sanctions could be a complication, in which case it would pay in rubles.

Credit rating agency Fitch said on Tuesday that Russia would be in default if it failed to meet Wednesday’s dollar interest payments after the 30-day grace period expired. “Payment in local currency of Russia’s US dollar Eurobond coupons due on March 16 would, if it were to occur, constitute a sovereign default upon the expiration of the 30-day grace period,” it said. Fitch.

Moscow last defaulted during the 1998 financial crisis, when it could not service its domestic ruble debts and Soviet-era debts. However, he continued to make payments on international bonds issued after the collapse of the Soviet Union.

Its only overall default on foreign debt so far was after the 1917 revolution, when the new Soviet government repudiated the debts of the Tsarist regime.

Russia currently owes about $40 billion in sovereign debt denominated in euros and dollars, including $20 billion held abroad.

Foreign banks have about $120 billion of exposure to Russia, mostly in Europe, according to data from the Bank for International Settlements.

Kristalina Georgieva, managing director of the IMF, said a Russian default would not trigger a global financial crisis because banks’ total exposure to Russia was “certainly not systemically relevant”.

City experts agree that the potential impact on global financial markets could be limited. “While a default is symbolic, it seems unlikely to have significant ramifications, both in Russia and elsewhere,” said William Jackson, chief emerging markets economist at Capital Economics.

The value of Russian government bonds has plunged to alarming levels since the invasion of Ukraine as investors priced in a default.

Russian sovereign debt sold since the annexation of Crimea in 2014 contains a provision for payments in alternative currencies if Moscow is unable to use foreign currencies for “reasons beyond its control”. Those issued since 2018 included clauses allowing payments in rubles.

However, the bonds in question on Wednesday shouldn’t include such fine print.

A default could trigger Russian debt default insurance policies known as credit default swaps (CDS), taken out to protect against such an eventuality.

Wednesday’s coupons are the first of several interest payment hurdles Russia faces, with an additional $615 million due later in March.

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