Russia on brink of first debt default in 24 years

Russia said it had sent interest payments due on its dollar bonds for processing on Wednesday but it could not guarantee investors would receive the cash, leaving the country on the brink of its first debt default since 1998.

Investors were awaiting $117 million (€106 million) in coupon payments on two Russian bonds, the first such payments since western countries responded to President Vladimir Putin’s invasion of Ukraine with unprecedented financial sanctions. The deadline marks a crucial test of Moscow’s willingness and ability to continue servicing its external debt.

Russia’s finance minister Anton Siluanov said on Wednesday that the payment instruction had been sent to the US bank that usually handles such transactions but there was a risk the cash would not get through, according to state newswire Ria Novosti.

Earlier this week, Mr Siluanov said that payment would be made in roubles if the transfer was unsuccessful, adding that western sanctions freezing some of the Russian central bank’s assets were an attempt to force the country into an “artificial default” on its $38.5 billion of foreign currency bonds.

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“Claims that Russia cannot fulfil its sovereign debt obligations are untrue. We have the necessary funds to service our obligations,” he told state broadcaster Russia Today earlier this week.

Credit rating

But a “forced redenomination” of coupon payments into roubles would indicate “that a default or a default-like process has begun”, Fitch Ratings said. The company would further downgrade Russia’s credit rating to “restricted default” if the payment was not made in dollars within the 30-day grace period that follows Wednesday’s deadline.

Some of Russia’s dollar- and euro-denominated bonds contain a fallback clause allowing repayment in roubles, but the two bonds with coupons due on Wednesday are not among them.

Western investors have been bracing themselves for default since the imposition of US and European sanctions against the Russian central bank last month, sending bond prices tumbling. They recovered somewhat on Wednesday after the Financial Times reported that Ukraine and Russia had made significant progress on a tentative 15-point peace plan including a ceasefire, but continued to trade at levels that imply a default is highly likely. A dollar bond maturing in 2023, one of the two due to pay a coupon on Wednesday, rose to 38 cents on the dollar from 26 cents on Tuesday.

Western investors, who held about $170 billion of Russian assets before the invasion, have already sustained heavy losses.

Maturing bonds

A default on Russia’s external debt – of which roughly $20 billion was in the hands of foreigners before the invasion – would also raise questions about the country’s larger pile of rouble debt, and about $90 billion of foreign-currency bonds issued by Russian companies.

The Russian government has already said a recent coupon payment on these local bonds would not reach foreign holders, citing a central bank ban on sending foreign currency abroad. Some Russian companies, however, have continued to make interest payments and repay maturing bonds, to the surprise of many investors.

Russia’s last sovereign default in 1998 triggered a financial crisis and led to the near-collapse of US hedge fund Long-Term Capital Management. Then, the government restructured its rouble debt and Soviet-era dollar-denominated debt, but continued to make payments on international bonds issued since the collapse of the Soviet Union.

The last comprehensive default on foreign debt came in the aftermath of the Russian Revolution, when the Bolshevik government repudiated Tsarist-era debts. – Copyright The Financial Times Limited 2022