Russian Finance Minister Anton Siluanov (seen here with Russian President Vladimir Putin in 2019) reportedly told the Russian newspaper Vedomosti that Moscow would continue to service foreign debts in rubles, but foreign Eurobond holders would have to open accounts. in rubles and in strong currency with Russian banks in order to receive payments.
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Russia could enter its first major foreign debt default in more than a century after a period of default on two international bond payments expired on Sunday night.
The $ 100 million interest payments were due on May 27 and subject to a grace period that expired Sunday night. Some media outlets have reported that bondholders have not yet received their payments, as Russia’s attempts to pay in its ruble currency were blocked by international sanctions.
Comprehensive sanctions imposed by Western powers in response to Russia’s unprovoked invasion of Ukraine, along with countermeasures by Moscow, have effectively excluded the country from the global financial system, but so far the Kremlin has managed to find ways to get payment to bondholders in many cases. .
Efforts to circumvent the sanctions, however, took a further hit in late May, when the U.S. Treasury Department allowed the expiration of a major exemption. The waiver had previously allowed Russia’s central bank to process payments to holders of dollar-denominated bonds through US and international banks, on a case-by-case basis.
Russian Finance Minister Anton Siluanov suggested earlier this month that Russia may have found another means of payment. Moscow sent $ 100 million in rubles to its domestic repayment house, but the two bonds in question are not subject to a ruble clause that would allow the payment to be converted into local currency overseas.
Reuters reported early Monday, citing two sources, that some Taiwanese holders of Russian Eurobonds did not receive the interest payments due on May 27, indicating that Russia could enter into its first non-payment of external debt since 1918, despite having enough money and willingness to pay. .
Siluanov reportedly told Russia’s state news agency RIA Novosti that the blocking of payments did not constitute a real failure, which usually comes as a result of unwillingness or inability to pay, and called the situation a “farce”.
Another $ 2 billion payment must be paid before the end of the year, although some of the bonds issued after 2014 are allowed to be paid in rubles or other alternative currencies, under contracts.
Although the signals are that payments have indeed been hampered by international sanctions, it may take some time to confirm non-payment.
Decades of non-payment?
Timothy Ash, senior sovereign emerging markets strategist at Bluebay Asset Management, said that while non-payment may not have much immediate impact on the market, longer-term Russian sovereign Eurobonds trading at 130 cents before the invasion have already settled between 20 and 30 cents, and are now trading at predetermined levels.
“Indeed, Russia has probably already failed for some ruble instruments owed to foreigners in the weeks immediately following the invasion, although after withdrawing their ratings, the rating agencies were unable to call this a bankruptcy.” Ash said in a note Monday.
“But this non-payment is important because it will affect Russia’s estimates, market access and financing costs for the coming years. And important here, given that the US Treasury forced Russia to go bankrupt, Russia will be able to come out of default only when the US Treasury gives bondholders the green light to negotiate terms with Russia’s foreign creditors.
Ash suggested that the process could take years or decades, even in the event of a ceasefire failing to reach a full peace agreement, meaning that Russia’s access to foreign funding would remain limited and costly. higher long-term borrowing. .
He argued that Russia’s alternative sources of foreign financing beyond the West, such as Chinese banks, would also be reluctant to look beyond default.
“If they are prepared to face the risks of secondary sanctions which they do not yet have and still give to Russia, they will add a large risk premium to lending rates for the prospect of somehow withdrawing in future talks. for debt restructuring, “Ash said.
“It just makes lending much harder for Russia, so people will avoid it. And that means lower investment, lower growth, lower living standards, capital flight and human brain) and a vicious circle of decline for the Russian economy. “
Russia has so far managed to implement successful capital controls that have supported the ruble currency and has continued to bring significant revenues from energy exports as a result of rising oil and gas prices.
However, Ash suggested that carbon transition and accelerated Western diversification away from Russian energy and goods mean that this “golden goose cooks two to three years later”.
“So in a two to three year perspective, Russia is facing a collapse in export earnings, with almost no access to international funding due to sanctions and failure,” he said.
“Meanwhile, as much of Putin’s military has been destroyed in Ukraine, he will struggle to fund military reconstruction, which he will be desperate to achieve given his desire to maintain some kind of equality with NATO. -n ”.
The resulting diversion of resources from consumption and military investment, Ash argued, could lead to a prospect of “decay and decline” for Putin’s Russia.
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