Russia pushed to historic default by sanctions

London — Russia's first international bond The White House, which made it the default, said that after more than a century, widespread sanctions have effectively separated the country from the global financial system and made assets out of control.

The Kremlin, who has the money to pay thanks to oil and gas income, quickly refused the claim and accused the West of pushing it to an artificial default. Did.

Earlier, some bondholders stated that they did not receive overdue interest on Monday after the expiration of their major payment deadlines on Sunday.

Russia has been struggling to maintain $ 40 billion in outstanding bonds since its invasion of Ukraine on February 24th.

"This morning's news about the discovery of Russia's defaults is the first time. How powerful the United States has taken with its allies and partners over a century and how dramatic it is to Russia's economy. It shows how much it has had an impact, "US officials told bystanders at the G7 Summit. In German.

Since the Bolshevik Revolution over a century ago, Russia's efforts to avoid the first major defaults in international bonds came in late May from the Office of Foreign Assets Control. The Asset Management Bureau has become an obstacle. Control (OFAC) has effectively blocked Moscow from making payments.

"Since March, I thought Russia's default was probably inevitable. When was the problem?" Said Dennis Franitzky, head of sovereign law firm Quinn Emmanuel. He told Reuters before the deadline on Sunday.

"OFAC has intervened to answer that question for us, and the default is now for us."

Russia can now borrow internationally Formal defaults are mostly symbolic, not to mention that you don't have to borrow thanks to the abundant oil and gas export revenues. However, the stigma will probably raise its borrowing costs in the future.

The payment in question is the $ 100 million interest on two bonds denominated in US dollars and euros that Russia was due to pay on May 27. There was a grace period for payment. A 30-day period that expired on Sunday.

The Russian Treasury said it had paid its National Settlement Vault (NSD) in euros and dollars, adding that it had fulfilled its obligations.

On a phone call with reporters, Kremlin spokesman Dmitry Peskov said, "It's not our problem" that Euroclear blocked payments due to Western sanctions against Russia. Said.

Clearinghouse Euroclear did not respond to a request for comment.

Some Taiwanese bondholders did not receive payments on Monday, sources told Reuters.

The prospectus does not specify an exact deadline, so lawyers say Russia may pay these bondholders by the end of the next business day. It states that there is.

Credit rating agencies usually officially downgrade a country's credit rating to reflect defaults, but this applies in the case of Russia as most institutions no longer rate countries. not.

Legal entanglement

The legal situation surrounding bonds looks complicated.

Russian bonds have been issued under unusually diverse conditions and were recently sold when Moscow was already facing sanctions in the 2014 Crimean annexation and the poisonous case in the United Kingdom. Bond ambiguity is increasing. 2018.

Rodrigo Oliverless-Caninal, Chairman of Banking and Financial Law at Queen Mary University of London, constitutes an exemption from Russia's obligations, or makes clear the difference between receiving and collecting payments Said you need to.

"All of these issues are subject to court interpretation," Olivares-Caminal told Reuters.

In a sense, Russia is already the default.

The Derivatives Commission has determined that a "credit event" has occurred on some Russian securities. This resulted in payments on some of the Russian credit default swaps. This is the product that investors use to insure their defaults.

This was caused by Russia's failure to earn $ 1. 9 million payments of accrued interest on payments due in early April.

Until the invasion of Ukraine, sovereign defaults seemed unthinkable, and Russia had an investment grade rating shortly before that time. Defaults are also rare, as Moscow has the funds to repay its debt.

The Office of Foreign Assets Control of the US Treasury has issued a temporary exemption known as General License 9A to allow Moscow to continue paying investors. The United States revoked the exemption on May 25 as Washington tightened sanctions on Russia and effectively blocked payments to US investors and businesses.

The expired OFAC license is not the only obstacle in Russia. In early June, the European Union imposed sanctions on NSD, the agent for Russian eurobonds.

Over the past few days Moscow has tried to deal with future payments and find a way around the default.

President Vladimir Putin began interim proceedings last Wednesday, signing a decree giving the government a 10-day grace period to select banks to process payments under the new scheme, Russia Suggested to consider the debt fulfilled when paying bondholders in the ruble. Russian land.

"Russia isn't just saying it's complying with its bond's terms-based obligations," Zia Ullah, a partner and corporate crime and investigator at law firm Eversheds Sutherland, told Reuters. Told.

"For example, if you are not satisfied as an investor, for example, if you know that money is stuck in your escrow account, this is effectively what Russia is saying. It will have a practical impact. You will fulfill your obligations, you do not meet the terms of the bond. "