March 2nd wasn't a great day for Igor Sechin, head of Moscow-controlled oil and gas giant Rosneft, who's documented by the EU as one of Vladimir Putin's closest confidants and known closer to home as "Darth Vader".
That night saw French authorities seize Sechin’s superyacht, Amore Vero, estimated to be worth $120 million (€109 million), as it attempted to leave a port near Marseilles, in breach of sanctions the EU had slapped on a host of oligarchs a week earlier over Russia’s invasion of Ukraine.
Holders of $2 billion of Rosneft bonds – issued through an Irish special purpose funding vehicle (SPV) beloved by Russian companies over the past decade – faced a nail-biting few days of their own earlier this week as the state-owned company failed to repay them before the debt fell due last Sunday. Happily, they got their money back on Wednesday, in dollars.
But they had good reason to be nervous. Concerns surrounding the settlement of the bonds had gone into overdrive when Putin issued an edict last weekend authorising the payment of bondholders from “hostile” nations in roubles, as Russian state institutions, companies and individuals close to the Kremlin have been hit by waves of western sanctions in recent weeks.
Repayment in anything other than the currency in which the bonds had been issued – dollars, in this case – would have been seen as tantamount to default.
It's not clear how the payments got around Putin's decree. It's speculated that the transfers – and those paid on Monday to bondholders in fellow state-controlled energy giant Gazprom – had already been sanctioned before he declared that overseas bondholders be paid in a currency that's in free-fall.
Meanwhile, Bloomberg reported on Friday that Russian Railways hadn't yet made a €25 million euro interest, or coupon, payment – due since Sunday – on bonds that had been issued by its Irish SPV, known as RZD Capital.
It can only add to growing market nervousness about a default by the Russian Federation itself, which has about $40 billion of its borrowings denominated in dollars and euros.
Over $23 billion of these are technically listed on the Euronext Dublin exchange, the world's No1 bond listings venue, under prospectuses approved by the Central Bank (the securities themselves are actually governed by English law).
The bonds aren’t actually traded on the Irish exchange, but over the counter in securities broker-dealer hubs such as London and Frankfurt. Still, Euronext Dublin and an ecosystem of professional services firms in the capital earn tidy fees from the bond listings line of work, as well as a sister business in fund listings.
As such, Dublin has played its role in facilitating Putin’s government in accessing global debt markets over the years, despite the likes of Russia’s 2008 invasion of Georgia; 2014 annexation of Crimea, and the launch of a military campaign Syria in 2015 that helped president Bashar al-Assad to devastating effect.
For example, global investors weren’t dissuaded from snapping up €1 billion of Kremlin bonds in late November 2018 (which, again, ended up being listed in Dublin) only days after Russia seized three Ukrainian ships in the Black Sea, fuelling tensions between the two countries.
Bond market observers were reported at the time to have said that the bond deal was likely deliberately timed to antagonise the West and show that the Kremlin still had access to capital markets, despite the international condemnation of actions. Who’s to know for sure? But investors certainly weren’t put off. Until now, and not necessarily by choice.
International investment funds with large exposures to Russia – including ones domiciled in Ireland – have suffered large outflows and, in some cases, temporary suspensions, as western allies have unleashed waves of sanctions against Russian entities and individuals as a result of the war on Ukraine over the past two weeks.
The sanctions have also hit most trading in Russian securities.
The Irish-listed Russian sovereign bonds have been suspended too, removing the capacity for them to be traded on an exchange and limiting the ability of investors to buy and sell them them in the more common off-exchange market.
The Institute of International Finance, the trade association for the global financial services industry, forecast on Thursday that western sanctions – including the cutting of several Russian banks off from the Swift international payments messaging system and freezing much of Moscow’s $640 billion of foreign-exchange reserves – have triggered a severe recession in Russia that will see its economy shrink by 15 per cent this year.
It would equate to a collapse worse than the 2008-2009 Great Recession and Russia’s 1998 debt default crisis combined.
Fitch, the debt ratings agency, came out this week to warn that a Russian default "is imminent", as it downgraded its stance on the country to nine levels deep into junk bond territory. The International Monetary Fund followed up on Thursday, warning that the prospect of the country reneging on its debt is no longer "an improbable event".
Of course, the markets are already ahead. Trading in a form of financial markets insurance – known as credit-default swaps – against a non-payment by Russia has spiralled higher in the past two weeks. The latest pricing of these instruments suggesting a 70 per cent default within a year.
Some $65.6 million of a semi-annual coupon payment on $3 billion of Dublin-listed bonds is due on March 21st (about a week after Russia faces $107 million of interest payments on other foreign bonds).
Meanwhile, about $102 million of interest is scheduled to be paid on a $4 billion Irish-listed bond at the end of the month. Russia has a grace period of 30 calendar days to meet the payments before going into default.
The closest maturity date a Dublin-listed bond is April 2025 when $1 billion of debt is scheduled to be repaid in fully. Elsewhere, Russia faces a principal repayment of $359 million on March 31st, followed by a larger $2 billion bond that matures on April 4th.
Although Ireland is the official home to Russian-related funding SPVs holding €37 billion of assets and €11.4 billion of Russian shares and bonds (out of a total of €4 trillion of international fund assets domiciled in the State), according to late 2021 data from the Central Bank, the direct domestic exposure is minimal. Insurance companies own less than €100 million of Russian assets, and households about €1 million.
But, of course, the conflict is playing havoc elsewhere in the global financial markets, with spiralling oil and other commodity prices, causing problems for the world economy and likely to depress growth.
A Russian default would hit emerging markets in the first instance, according to analysts. But it would surely reverberate much further.