Daily Management Review

Sanctions Have Forced Russia Into A Historic Default


Sanctions Have Forced Russia Into A Historic Default
According to the White House, Russia has defaulted on its foreign obligations for the first time in more than a century, as broad sanctions have virtually cut the country off from the global financial system, rendering its assets untouchable.
The Kremlin, which has the funds to make payments thanks to oil and gas income, quickly dismissed the charges, accusing the West of forcing it into a fake default. more info
Earlier, some bondholders complained that they had not received overdue interest on Monday, despite the fact that a critical payment deadline had passed on Sunday.
Since its invasion of Ukraine on February 24, Russia has failed to meet payments on $40 billion in outstanding bonds.
"This morning's news around the finding of Russia's default, for the first time in more than a century, situates just how strong the actions are that the U.S., along with allies and partners have taken, as well as how dramatic the impact has been on Russia's economy," the U.S. official said on the sidelines of a G7 summit in Germany. read more
Russia's efforts to avoid what would be the country's first major default on international bonds since the Bolshevik revolution more than a century ago were thwarted in late May when the United States Treasury Department's Office of Foreign Assets Control (OFAC) effectively barred Moscow from making payments.
"Since March we thought that a Russian default is probably inevitable, and the question was just when," Dennis Hranitzky, head of sovereign litigation at law firm Quinn Emanuel, told Reuters ahead of the Sunday deadline.
"OFAC has intervened to answer that question for us, and the default is now upon us."
A legal default would be primarily symbolic, given Russia's inability to borrow abroad at the time and lack of need due to abundant oil and gas export profits. However, the stigma would very certainly enhance its borrowing costs in the future.
The payments in question are $100 million in interest on two bonds, one in US dollars and one in euros, which Russia was supposed to pay on May 27. The payments had a 30-day grace period that ended on Sunday.
Russia's finance ministry said it paid payments in euros and dollars to its onshore National Settlement Depository (NSD), and that it had met its responsibilities.
In a conference call with reporters, Kremlin spokesman Dmitry Peskov said the fact that Euroclear had banned payments due to Western sanctions against Russia was "not our problem."
Euroclear, the clearing house, did not respond to a request for comment.
According to media reports, several Taiwanese bondholders did not receive payments on Monday.
Due to the lack of a specific timeframe in the prospectus, lawyers believe Russia may have until the end of the next business day to pay these bonds.
Credit rating organisations typically decrease a country's credit rating to signify default, however this is not the case with Russia because most agencies no longer rate the country.
The legal position around the bonds appears to be complicated.
Russia's bonds have been issued with an extraordinary diversity of clauses, with an increasing level of ambiguity for those sold recently, when Moscow was already facing sanctions for its annexation of Crimea in 2014 and a poisoning incident in the United Kingdom in 2018.
According to Rodrigo Olivares-Caminal, head of banking and finance law at Queen Mary University in London, clarity is needed on what constitutes a discharge for Russia on its commitment, or the difference between receiving and recovering money.
"All these issues are subject to interpretation by a court of law," Olivares-Caminal said.
Russia has already been in default in several aspects.
A derivatives committee concluded that a "credit event" happened on some Russian securities, triggering a payout on some Russian credit default swaps - products used by investors to guarantee against debt default.
This was caused by Russia's failure to pay $1.9 million in accumulated interest on a payment due in early April.
A sovereign default had seemed unthinkable until the Ukraine invasion, with Russia having an investment grade rating shortly before that point. A default would also be exceptional given Moscow's ability to service its debt.
In early March, the US Treasury's OFAC issued a temporary waiver, known as a general licence 9A, to allow Moscow to continue paying investors. The waiver expired on May 25 as the United States intensified sanctions against Russia, effectively cutting off payments to US investors and entities.
The expiring OFAC licence is not Russia's sole stumbling block. The European Union sanctioned the NSD, Russia's designated agent for Eurobonds, in early June.
In recent days, Moscow has attempted to identify solutions to deal with upcoming payments and prevent a default.
Last Wednesday, President Vladimir Putin signed a decree establishing temporary procedures and giving the government 10 days to select banks to handle payments under a new scheme, implying that Russia will consider its debt obligations fulfilled when bondholders are paid in roubles and onshore in Russia.
"Russia saying it's complying with obligations under 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 are not satisfied, for instance, if you know the money is stuck in an escrow account, which effectively would be the practical impact of what Russia is saying, the answer would be, until you discharge the obligation, you have not satisfied the conditions of the bond."