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Russia slips into default zone as payment deadline expires

Image: Reuters Berita 24 English -  Some bondholders said on Monday that they still hadn't received overdue interest, even though a key ...

Image: Reuters

Berita 24 English -  Some bondholders said on Monday that they still hadn't received overdue interest, even though a key payment deadline had passed the day before. This would be the first time in decades that Russia's government would be in default.

Since it invaded Ukraine on February 24, Russia has had trouble making payments on $40 billion of outstanding bonds. This is because sweeping sanctions have cut the country off from the global financial system and made many investors unable to touch its assets.

The Kremlin has said many times that Russia has no reason to default, but it can't send money to bondholders because of sanctions. It says that the West is trying to force it into an artificial default.

Russia tried to avoid what would have been its first major default on international bonds since the Bolshevik revolution more than a century ago. However, in late May, the U.S. Treasury Department's Office of Foreign Assets Control (OFAC) made it impossible for Moscow to make payments.

Dennis Hranitzky, head of sovereign litigation at law firm Quinn Emanuel, told Reuters, "Since March, we've thought that a Russian default is probably inevitable; the only question was when." "OFAC has answered that question for us, and we are now in default."

Even though a formal default would be mostly symbolic because Russia can't borrow internationally right now and doesn't need to because oil and gas exports bring in a lot of money, the stigma would probably make it more expensive for Russia to borrow in the future.

Russia was supposed to pay $100 million in interest on two bonds, one of which was denominated in U.S. dollars and the other in euros, on May 27. There was a grace period of 30 days for the payments, which ended on Sunday.

Russia's finance ministry said that the payments were made in euros and dollars to its onshore National Settlement Depository (NSD), and that it has met all of its obligations.

Sources told Reuters that some Taiwanese bond holders had not been paid on Monday.

Many bondholders consider it a default if they don't get the money owed to them on time.

Since the prospectus doesn't say when Russia has to pay the bondholders, lawyers say it might have until the end of the next business day.


The bonds seem to have a complicated legal situation.

Russia's bonds have been sold with an unusually wide range of terms, and the terms of those sold more recently are becoming less clear. This is despite the fact that Moscow was already facing sanctions for taking over Crimea in 2014 and poisoning people in Britain in 2018.

Rodrigo Olivares-Caminal, who is in charge of banking and finance law at London's Queen Mary University, said that there needed to be more clarity about what it meant for Russia to be released from its obligation, or what the difference was between receiving payments and getting them back.

"All of these issues are open to interpretation by a court of law," Olivares-Caminal told Reuters. "But Russia hasn't given up any of its sovereign immunity or agreed to be ruled by any court in either of the two prospectuses."

In some ways, Russia is already behind on its bills.

A committee on derivatives decided that a "credit event" had happened on some of Russia's securities. This caused some of Russia's credit default swaps, which investors use to protect themselves against debt default, to pay out. This happened because Russia didn't pay the $1.9 million in interest that had built up on a payment that was due in early April.

Before the invasion of Ukraine, a sovereign default didn't seem possible. In fact, Russia was rated "investment grade" until just before the invasion. Moscow has the money to pay its debts, so a default would also be rare.

At the beginning of March, the OFAC gave Moscow a temporary waiver, known as a general licence 9A, so that it could keep paying its investors. It let it run out on May 25 because Washington was tightening sanctions on Russia, which meant that U.S. investors and entities couldn't get paid.

Russia's OFAC licence has expired, but that's not the only problem it has. At the beginning of June, the European Union put sanctions on the NSD, which is Russia's agent for its Eurobonds.

Moscow has been scrambling in recent days to find ways to pay its bills and avoid going bankrupt.

President Vladimir Putin signed a decree last Wednesday to start temporary procedures and give the government 10 days to choose banks to handle payments under a new plan. This suggests that Russia will consider its debt obligations met when it pays bondholders in roubles.

"Russia's claim that it is following the terms of the bond is not the whole story," Zia Ullah, partner and head of corporate crime and investigations at law firm Eversheds Sutherland, told Reuters.

"If you as an investor aren't happy, for example if you know the money is stuck in an escrow account, which is the practical effect of what Russia is saying, the answer is that you haven't met the conditions of the bond until you pay off the obligation.

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