Analysis: Russian debt investors in limbo as default risk rises

Russian ruble banknotes are seen in this illustration photo taken September 30, 2014. REUTERS/Maxim Zmeyev/Illustration/

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NEW YORK/WASHINGTON/LONDON, April 7 (Reuters) – Investors in Russian international bonds face an increasingly uncertain path to recover their money should Russia default, as the country itself even would face increased financial isolation and obstacles to regaining investor confidence.

Russia’s ability to meet its debt obligations is in focus after sweeping sanctions in response to Moscow’s invasion of Ukraine froze nearly half of its $640 billion in gold reserves and currencies and limited access to global payment systems.

The US Treasury Department this week suspended Russia’s ability to use foreign currency reserves held by the Russian central bank with US financial institutions to pay its debt.

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This forced Russia to come up with an alternative to pay off more than $600 million in sovereign debt, placing the ruble equivalent of those payments for bondholders from supposedly hostile nations in special accounts at the National Repository. Russian regulations. Read more

How bondholders access funds is a big question mark.

“Bondholders are planning scenarios now,” said Kenneth Rivlin, a partner in Allen & Overy’s New York office. “If they’re not, they should be.

“I think the road will be long and winding for bondholders to recover.”

Rivlin said the process of moving money from Russia to international bondholders was difficult because the chain’s financial institutions would risk sanctions and would have to hire outside lawyers to seek a license from sanctions authorities to proceed. .

Funds from Russia to bondholders have so far gone through the process of passing through correspondent bank JPMorgan (JPM.N) to paying agent Citi (CN). That fell apart this week, when JPM was blocked by the US Treasury from continuing. Read more

The sums involved are not negligible. JPM analysts said last month that foreigners held about $79 billion in Russian debt securities, including local-currency bonds, hard-currency sovereign Eurobonds and foreign-currency corporate Eurobonds. strong.

Data from industry tracker Morningstar Direct showed that major fund managers such as BlackRock, PIMCO and Western Asset had exposure to Russian bonds before the dispute began. PIMCO and BlackRock declined to comment. Western Asset did not immediately respond to a request comment.

Russia has a 30-day grace period to make the payment in dollars, but if the money does not appear in bondholders’ accounts within that time, it would constitute a default. If that happens, expect bondholders to sue, experts said.

“I imagine bondholders could sue Russia for non-payment, and maybe they would try to get the courts to seize frozen Russian assets as payment,” Benjamin Coates said. , a professor of history at Wake Forest University, who investigates the history of economic sanctions in the 20th century. .

Under sanctions put in place after Russia invaded Ukraine on February 24, foreign currency reserves held by the Russian central bank in US financial institutions were frozen. But the Treasury Department had authorized the Russian government to use those funds to make coupon payments on dollar-denominated sovereign debt on a case-by-case basis.

The payments had been authorized to “prevent disruption of US and European financial markets”, a US Treasury spokesman said on Monday.

“The first bond payments were also relatively small, and as the payments were going to increase, it was the right opportunity to force Russia to make tougher decisions,” the spokesman told Reuters. Read more

Brian O’Toole, a nonresident senior fellow at the Atlantic Council’s Center for Geoeconomics and formerly at the Treasury, said the permission to make the payments was likely due to concern over the effect of leading to a possible payment default by Russia.

The Treasury spokesman added on Wednesday that the decision to block payments was part of a wider plan to increase pressure against Moscow and was in preparation before grim images emerged from the Ukrainian town of Bucha after been recaptured from Russian forces, where bodies of shot civilians had been found. Read more

Blocking payments from its frozen reserves would force Moscow to make a choice “between depleting precious remaining dollar reserves or bringing in new revenue or defaulting,” the White House press secretary told reporters on Tuesday. , Jen Psaki.


Considering Russia’s fiscal situation, with a current account surplus of $250 billion, a default of a few billion dollars would be “largely a symbolic gesture”, said Elina Ribakova, deputy chief economist at the Institute of International Finance.

Still, a default – which would have been unthinkable before the invasion – could create a host of headaches for Russia.

Although it is already locked out of international debt markets due to Western sanctions, a default would mean it could not access it until creditors are fully repaid and all disputes arising from the default are settled. . Read more

If the sanctions are lifted at some point in the future, Russia’s reputation in the financial markets would still be tarnished. It would depress Russia’s credit ratings and drive up borrowing rates paid by the Russian government and businesses.

“Even if the war ends and sanctions are lifted, how willing will foreign companies and investors be to re-engage with the Russian economy?” said Coates.

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Additional reporting by Alexandra Alper in Washington; edited by Megan Davies and Leslie Adler

Our standards: The Thomson Reuters Trust Principles.

Carol M. Barragan