Expiration of payment term intensifies default risk for Russia

LONDON (Reuters) – Russia edged closer to default on Sunday amid few signs that investors holding its international bonds had received payment, heralding what would be the country’s first default in decades.

Russia has struggled to keep payments on $40 billion in bonds outstanding since its Feb. 24 invasion of Ukraine, which prompted sweeping sanctions that effectively cut the country off from the global financial system and returned its assets untouchable for many investors.

The Kremlin has repeatedly said there is no reason for Russia to default, but it is unable to send money to bondholders due to sanctions, accusing the West of trying to drive it to an artificial default.

The country’s efforts to avoid what would be its first major default on international bonds since the Bolshevik Revolution more than a century ago hit an insurmountable obstacle when the US Treasury Department’s Office of Foreign Assets Control (OFAC) effectively prevented Moscow from making payments at the end of May. .

“Since March, we thought a Russian default was probably inevitable, and the question was when,” Dennis Hranitzky, head of sovereign litigation at law firm Quinn Emanuel, told Reuters. “OFAC stepped in to answer that question for us, and the default is now on us.”

While a formal default would be largely symbolic given that Russia cannot borrow internationally at the moment and does not need to thanks to its rich oil and gas revenues, the stigma would likely increase its borrowing costs. in the future.

The payments in question are $100 million in interest on two bonds, one denominated in US dollars and the other in euros, which Russia was due to pay on May 27. The payments had a 30-day grace period, which will expire on Sunday.

The Russian Finance Ministry said it had made payments to its onshore National Settlement Depository (NSD) in euros and dollars, adding that it had fulfilled its obligations.

Read more: Russian-Ukrainian crisis: who is the beneficiary?

However, the funds are unlikely to reach many international holders. For many bondholders, not receiving the amounts due in their accounts on time constitutes a default.

With no exact deadline specified in the prospectus, lawyers say Russia could have until the end of the next business day to pay the bondholders.

The legal situation surrounding the bonds seems complex.

Russian bonds have been issued with an unusual variety of terms and an increasing level of ambiguity for those sold more recently, as Moscow was already facing sanctions for its 2014 annexation of Crimea and a poisoning incident in Great Britain. -Brittany in 2018.

Rodrigo Olivares-Caminal, chair of banking and finance law at Queen Mary University of London, said there was a need to clarify what constituted a discharge for Russia from its obligation, or the difference between receiving and recovering payments.

“All of these matters are subject to interpretation by a court, but Russia has not waived any of its sovereign immunities or submitted to the jurisdiction of any court in either prospectus,” said Olivares-Caminal to Reuters.

In some respects, Russia is already at fault.

A derivatives committee ruled that a ‘credit event’ had occurred on some of its securities, triggering a payout on some of Russia’s credit default swaps – instruments used by investors to insure exposure to debt versus default. It was triggered by Russia failing to make a payment of $1.9 million in accrued interest on a payment that was due in early April. Read more

Until the invasion of Ukraine, a sovereign default seemed unthinkable, with Russia being rated investment grade until recently. A default would also be unusual because Moscow has the funds to service its debt.

OFAC had issued a temporary waiver, known as General License 9A, in early March to allow Moscow to continue paying investors. He let it expire on May 25 as Washington tightened sanctions on Russia, cutting off payments to U.S. investors and entities.

The expiry of the OFAC license is not the only hurdle Russia faces, as in early June the European Union imposed sanctions on NSD, Russia’s designated agent for its Eurobonds. Read more

Moscow has been scrambling in recent days to find ways to manage upcoming payments and avoid a default.

President Vladimir Putin signed a decree last Wednesday to launch temporary procedures and give the government 10 days to choose banks to handle payments under a new regime, suggesting that Russia will consider its obligations fulfilled when it will pay bondholders in rubles.

“Russia saying it is meeting its obligations under the terms of the bond is not the whole story,” Zia Ullah, partner and head of corporate crime and investigations at the law firm, told Reuters. Eversheds Sutherland.

“If you as an investor are not satisfied, for example, if you know that the money is blocked in an escrow account, which would indeed be the practical impact of what Russia says, the answer would, until you discharge the bond, you have not fulfilled the conditions of the bond.

Reuters with an additional contribution from the GVS news desk

Martin E. Berry