Russia has been in default for the first time since the Bolsheviki Revolution over a century ago and has been further alienated from the global financial system by sanctions against the war in Ukraine.
The 30-day grace period for interest payments, which originally expired on May 27, expired on Sunday. However, checking the defaults can take some time.
"Banks seem to have complied with international sanctions and refrained from paying," said Chris Weafer, a veteran Russian economic analyst at consulting firm Macro-Advisory.
Last month, the US Treasuryterminated Russia's ability to repay billions of dollars in debt to international investors through US banksin contrast. Said to pay dollar-denominated debt. In the ruble, we offer "the opportunity for subsequent conversion to the original currency".
Russia denies default talk
Russia says it has money to pay debt, but Western sanctions freeze foreign exchange reserves held abroad Created an "artificial obstacle".
Kremlin spokesman Dmitry Peskov told reporters at a conference call on Monday that "there is no reason to call this situation the default," Russia paid but could handle it for sanctions. Said he didn't.
The other side said, "This happened because of sanctions, but the sanctions were entirely under your control," said Jay, the top sovereign debt attorney at Wilk Auslander's company in New York.・ S. Auslander said. "This was all under your control, as all you had to do was invade Ukraine."
Important to know about Russian defaults That is:
How much debt does Russia owe?
About US $ 40 billion in foreign bonds, about half of which is for foreigners. Before the war began, Russia had about $ 640 billion in foreign currency and gold reserves, many of which were held abroad but are now frozen.
Since the collapse of the Russian Empire and the Bolshevik Revolution when the Soviet Union was founded, Russia has not defaulted on its international debt. Russia defaulted on its domestic debt in the late 1990s, but was able to recover from it with the help of international aid.
Russia has virtually defaulted for months in the eyes of fixed income investors, said Liam Peach, an economist specializing in emerging European markets for capital economics. ..
Insurance contracts covering Russian debt have an 80% chance of defaulting over several weeks , and rating agencies such as Standard & Poor's and Moody's junk national debt. It is placed deep in the area.
How are the defaults official?
Rating agencies can consider a country to be functionally default by lowering its debt rating. Alternatively, the court can declare the country to be the default. However, since the beginning of the conflict, major rating agencies have suspended the rating of national debt.
Bond holders holding credit default swaps (contracts that act like insurance contracts against defaults) ask a committee of financial company representatives whether defaults trigger payments. You can ask to do this, but this is not yet official a default declaration.
The Credit Derivatives Decision Board, an industry group of banks and investment funds, is likely to flag "credit events," Peach said.
The Panel ruled on June 7 that Russia did not pay the required additional interest after paying the bonds after the due date of April 4. However, due to uncertainty about how sanctions would affect the settlement, the Commission postponed further action.
What can foreign investors do to make money?
The formal way to declare a default is if more than 25% of bondholders say they didn't receive the money. When that happens, all other foreign bonds in Russia will also default, and it is stipulated that bondholders can seek a court ruling to force payments.
Under normal circumstances, investors and defaulting governments usually negotiate a settlement that gives bondholders new bonds of low value but at least partial compensation.
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However, sanctions prohibit transactions with the Russian Ministry of Finance. And no one knows when the war will end or how much the default bond is worth.
In this case, Auslender said, declaring a default and complaining that "it may not be the wisest choice." It is impossible to negotiate with Russia and the unknowns are so large that creditors may decide to "stick firmly for now".
Investors hoping for Russian debt are probably already heading out and may have bought bonds at knockdown prices in the hope of benefiting from the settlement in the long run. there is. And they may want to be unobtrusive for a while to avoid being involved in the war.
When a country defaults, it will be cut off from bond market borrowing until the default is resolved and investors regain the capacity and motivation of the government. can do. payment. But Russia is already separated from the western capital markets, so returning to borrowing is a long way off.
The Kremlin can still rent a ruble at his home, where he relies primarily on Russian banks to buy bonds.
What does the official default mean for Russia?
Western sanctions on the war have fled Russia and disrupted trade and financial relations between Russia and the rest of the world. The default is another symptom of that quarantine and confusion.
Weefer hasn't borrowed internationally for years in sanctions and earns a lot of money from exporting commodities such as oil and natural gas, so the default is now However, he states that it will not affect the Russian economy.
But in the long run, when the war is settled and Russia tries to rebuild its economy, "this is where default heritage matters, like if individuals and businesses deteriorate. It's a credit score, and it will take years to get over it. "
Investment analysts are cautious about Russia's defaults not affecting global financial markets and institutions resulting from previous defaults in 1998. At that time, Russia's domestic ruble bond defaults led the US government. Larger US hedge funds, feared to collapse, could shake the broader financial and banking system in order to intervene and force banks to bail out long-term capital management.
Bond holders (for example, funds investing in emerging market bonds) can suffer serious losses. However, Russia plays a small role in emerging market fixed income indexes, limiting losses to fund investors.
"The spillover effect on other parts of the world should be limited," Peach said.
However, Russia's defaults can have a ripple effect by putting pressure on the global bond market, increasing investor risk aversion and discouraging investors from moving forward. Weefer said.
