Due to the fact that the Russian license to make payments in dollars has not been renewed, Russia cannot transfer interest on bonds denominated in this currency to investors. If the money is not paid within the grace period (30 days), credit rating agencies such as Moody's and Fitch will assign Russia default status. In fact, this will not allow attracting investments and loans. Even if creditors can be found, payments for the use of borrowed funds will increase many times over.
Causes of Russia's Approaching Default
The reasons for this situation are the invasion of the Russian Federation into Ukraine and the imposition of sanctions by the world community on Russia. Russia could have paid the coupon on the bonds, but it has been stripped of the financial instruments to do so. Initially, there was a loophole in the sanctions that allowed the Russian Federation to pay creditors, but the refusal of the US Treasury Department to renew Russia's license to work with dollars blocked this loophole.
On May 27, 2022, the Russian Ministry of Finance announced that it had transferred $100 million to pay investors, but the money did not reach bondholders. The reason is that the American banks that make these payments have lost the ability to accept money from Russia.
How can lenders act?
Most likely, creditors will start seizing Russia's assets around the world in order to get their money back. A textbook example of such arrests is the bankruptcy of the Argentine hedge fund NML. Then the creditors literally pursued the training sailboat of the Argentine fleet Libertad. As soon as the ship docked in the port of Ghana, he was arrested by court order.
Arrest can be imposed on any Russian property: buildings, ships, aircraft, etc. Investors will demand blocking and funds held by Russia in foreign banks. In particular, funds of the Central Bank of Russia blocked in the West can be used to repay debts to creditors.
Russian Finance Minister Anton Siluanov said that if it is impossible to pay in dollars, payments will be made in rubles. However, this is a material breach of the loan agreement, and creditors will not agree to this. If creditors agree, Moody's will still default on Russia due to a breach of the loan agreement.
Russia's financial situation
Currently, there are four issues of Russian bonds in circulation, the nominal value of which is about $40 billion. The real exchange value of these securities is 75-90% lower. In 2022, Russia still has to pay creditors $1 billion in coupon income.
Due to income (primarily from the sale of oil and gas), the Russian Federation has solid financial reserves. Formally, the volume of foreign exchange reserves of the Russian government is 640 billion dollars, but about half of these reserves have already been blocked in the West due to the imposed sanctions.
Russia continues to receive high revenues from sales of fuel resources. At the same time, due to sanctions, imports of goods decreased by about 40%. This caused a drop in demand for foreign currency within the Russian Federation and a sharp increase in the ruble against the dollar. Today the ruble is worth 15% more than at the beginning of the year. Russia could pay off the bonds, but it is being pushed into default by sanctions imposed over its invasion of Ukraine.
Learn more about the sanctions imposed against Russia on our Online.
Publication Date: 01.06.2022
