Russia heads for default as bond payment deadline passes

Investors do not expect default to have serious economic consequences for Moscow as issue preventing payment was not lack of funds

A deadline for payment on Russia’s foreign debt has passed, putting the country on course to default for the first time in almost a quarter-century after western countries blocked Moscow’s attempts to circumvent financial sanctions.

About $100 million (€94.7 million) worth of interest on Russian government bonds came due late on Sunday with no sign of payment, marking the end of a 30-day grace period during which the country sought to avoid a full default.

Russia has sufficient foreign exchange reserves thanks to revenues from oil and gas exports, but escalating sanctions following its invasion of Ukraine have frozen the country out of the global financial system.

The missed payments would be the country’s first debt default since the Russian financial crisis in 1998, and come just as western nations are seeking to ramp up pressure on Moscow.

A formal declaration of default would usually come from ratings firms, but European sanctions led to them withdrawing ratings on Russian entities. According to the documents for the notes, holders can call one themselves if owners of 25 per cent of the outstanding bonds agree that an “event of default” has occurred.

G7 leaders meeting in Europe on Sunday sought a deal to impose a “price cap” on Russian oil as part of efforts to curb Moscow’s ability to fund the war in Ukraine. Ukraine’s president Volodymyr Zelenskiy is slated to join the summit via video link on Monday.

The default on payments originally due on May 27th comes months after a collapse in Russian government debt this year triggered by President Vladimir Putin’s invasion of Ukraine. Bonds maturing in 2036 were trading at about 20 cents on the dollar on Monday in Asia.

“It’s pretty much in the price now,” said Paul McNamara, an emerging markets bond fund manager at GAM, of a potential default.

The US treasury last month closed a sanctions loophole that would have allowed American investors to receive payments from the Russian government. The European Union also imposed sanctions on Russia’s national settlement depository in early June, preventing Moscow from transferring dollar payments to international securities depositories, which could then settle trades for western clients.

Russian officials, including finance minister Anton Siluanov, have accused western governments of trying to force the country into an “artificial” default and have attempted to circumvent the sanctions by suggesting Moscow could pay in roubles if dollar payments cannot reach bondholders.

Mr Putin signed a decree last week creating a mechanism for making the payments due on Sunday in roubles, along with another $400 million in payments due on Thursday and Friday. However, the terms of these bonds do not contain provisions for making payments in roubles.

The Russian currency has also tumbled in the wake of the invasion, and on Monday was down about 40 per cent against the dollar for the year to date. However, investors did not expect the default to have serious economic consequences for Moscow since the issue preventing the payments was not a lack of funds.

“I think it’s an interesting demonstration of what the Americans can do if they choose to, but I don’t think it has huge economic implications for Russia,” said Mr McNamara. – Copyright The Financial Times Limited 2022/Bloomberg