The clock in the Spasskaya Tower showing the time at noon is displayed next to the Moscow Kremlin and St. Basil’s Cathedral on March 31, 2020. REUTERS / Maxim Shemetov
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- The grace period ends with a $ 100 million interest payment due on May 27
- Some Taiwanese bondholders did not receive payment on Monday, sources said
- Russia says it has funds to pay, sanctions are to blame
- US resignation expires, EU sanctions on NSD erase payments to Russia
- The CDS committee has already stated that a “credit event” occurred.
LONDON, June 27 (Reuters) – Russia appeared ready for its first sovereign default in decades, as some bondholders said they had not received interest due on Monday after a key one-day payment deadline expired before.
Russia has struggled to keep payments of $ 40 billion in outstanding bonds since the invasion of Ukraine on Feb. 24, as heavy sanctions have pushed the country apart from the global financial system and made its assets be untouchable for many investors.
The Kremlin has repeatedly said there is no reason for Russia to default, but that it cannot send money to bondholders because of sanctions, accusing the West of trying to lead it to artificial default.
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Russia’s efforts to avoid what would be its first major breach of international bonds since the Bolshevik revolution more than a century ago found an insurmountable hurdle in late May when the Office for the Control of Foreign Assets (OFAC) of the US Treasury Department effectively blocked Moscow from making payments.
“Since March we thought that a default by Russia is probably inevitable, and the question was when,” Dennis Hranitzky, head of sovereignty litigation at law firm Quinn Emanuel, told Reuters. “OFAC has stepped in to answer this question for us, and now it’s up to us to default.”
While a formal default would be largely symbolic given that Russia cannot borrow internationally at this time and does not need it thanks to abundant oil and gas export earnings, the stigma would likely increase its borrowing costs in the future. future.
The payments in question are $ 100 million in interest on two bonds, one denominated in US dollars and another in euros, which Russia was due to pay on May 27. Payments had a 30-day grace period, which expired Sunday.
Russia’s finance ministry said it has made payments to its land-based National Settlement Deposit (NSD) in euros and dollars, adding that it has fulfilled its obligations.
Some Taiwanese bondholders had not received payments on Monday, sources told Reuters. Read more
For many bondholders, not receiving the money due on time into their accounts is a breach.
Without an exact deadline specified in the brochure, lawyers say Russia could have until the end of the next business day to pay the bonds.
MINUTE LETTER
The legal situation surrounding the bonds seems complex.
Russia’s bonds have been issued with an unusual variety of terms and a growing level of ambiguity for the most recently sold, as Moscow was already facing sanctions for its annexation of Crimea in 2014 and a poisoning incident in Great Britain in 2018.
Rodrigo Olivares-Caminal, a professor of banking and financial law at Queen Mary University in London, said it was necessary to clarify what a discharge for Russia meant from its obligation or the difference between receiving and recovering payments.
“All these issues are subject to the interpretation of a court, but Russia has not waived any of its sovereign immunities and has not submitted to the jurisdiction of any court in either prospect,” Olivares-Caminal said. and Reuters.
Somehow, Russia is already by default.
A derivatives committee has ruled that a “credit event” had occurred in some of its securities, prompting a payment of some of Russia’s default credit swaps, instruments used by investors to secure exposure to debt against default. This was caused by Russia not making a $ 1.9 million in interest accrued payment on a payment that was due in early April. Read more
Until the invasion of Ukraine, a sovereign breach seemed unthinkable, with Russia qualifying as investment grade until shortly before that point. A default would also be unusual, as Moscow has the funds to pay off its debt.
OFAC had issued a temporary waiver, known as General License 9A, in early March to allow Moscow to continue paying investors. It let it expire on May 25 when Washington tightened sanctions on Russia, effectively cutting payments to U.S. investors and entities.
The expiration of the OFAC license is not the only obstacle facing Russia, as in early June the European Union imposed sanctions on the NSD, the agent designated by Russia for its Eurobonds. Read more
Moscow has struggled in recent days to find ways to deal with upcoming payments and avoid default.
President Vladimir Putin last Wednesday signed a decree to initiate temporary proceedings and give the government 10 days to choose banks to manage payments under a new scheme, suggesting Russia will consider meeting its debt obligations when it pays holders of bonds in rubles.
“Russia saying it is fulfilling its obligations under the terms of the bond is not the whole story,” Zia Ullah, a partner and head of corporate crimes and investigations at the law firm Eversheds Sutherland, told Reuters.
“If you as an investor are not satisfied, for example, if you know that the money is stuck in a guarantee account, that would effectively be the practical impact of what Russia is saying, the answer would be, until you meet the obligation , have not fulfilled the conditions of the bail “.
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Report by Karin Strohecker; Additional report by Emily Chan in Taipei and Sujata Rao in London; Editing by David Holmes, Emelia Sithole-Matarise and Simon Cameron-Moore
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