Russia ruled in potential default on ruble debt payment

The MICEX-RTS building of the Moscow Stock Exchange in Moscow on February 24, 2022. (Andrey Rudakov/Bloomberg)

Russia has been tried for breaching the terms of two bonds by a derivatives panel, marking another milestone on the nation’s path to its first default on its foreign debt in a century.

The Credit Derivatives Determination Committee said Wednesday that its payment of rubles on two-dollar bonds was a “potential default of payment” event for credit default swaps. The group, which includes Goldman Sachs, Barclays and JPMorgan Chase, said the potential failure happened on April 4.

The nation could still avoid a default if it paid bondholders in dollars before the end of a 30-day grace period on May 4.

“The covenants were pretty clear that ruble payments on dollar debt would constitute default,” said Brendan Mckenna, currency strategist at Wells Fargo Securities in New York. “On May 4 – unless the logistical challenges of paying the debt are resolved, which seems unlikely – I would expect Russia to be declared default on its external debt.”

The issue of payments is just one example of the fallout from the sanctions imposed on the country as a result of its invasion of Ukraine. The extensive restrictions cut him off from the financial system and complicated transactions that had previously been executed smoothly and with little attention.

This means that for now, Russia is on the brink of its first default on its foreign loans since the Bolshevik repudiation of Tsarist debt in 1918. Time is running out before the sovereign is officially declared in default. Swap holders can then begin the payment process on contracts covering approximately $40 billion in debt.

Russian companies are increasingly caught up in the sanctions turmoil. The CDDC has already decided that Russian Railways JSC swaps will be triggered after a bond payment is blocked.

This week alone, three of Russia’s largest banks missed interest payments on their bonds.

VTB Bank, Alfa Bank and Russian Agricultural Bank were all due to pay coupons on their subordinated bonds over the past few days, but no transfers have reached foreign investors, according to people familiar with the matter, who spoke to Bloomberg under the guise of ‘anonymity.

Alfa Bank said it was “technically impossible to fulfill the Eurobond obligations”, despite having the cash to pay. The Agricultural Bank of Russia requested permission from the Bank of Russia in advance to make the payment and also instructed the paying agent — the London branch of BNY Mellon — to send the appropriate instruction to the central bank.

VTB, meanwhile, made the payment in rubles, according to Russian newspaper Vedomosti. Bondholders based in Russia and “friendly” countries were credited directly to their ruble accounts, while investors from “hostile” countries received rubles in “type C” accounts held in Russia, reported the newspaper.

The official declaration of sovereign default would traditionally be made by rating agencies, but all have withdrawn Russia coverage to comply with a European Union ban.

However, S&P Global Ratings took the initiative to cut the government in “selective default” before its release. Moody’s Investors Service later said Russia’s ruble payments on the dollar bonds would be “considered a default” if the situation was not corrected within the grace period. He added that the comments did not constitute a change in credit rating.

The Russian Finance Ministry argued that it had met its debt obligations. He blamed the United States and others for blocking payments to creditors and threatened legal action.


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Elaine R. Knight