Russia has struggled to maintain $ 40 billion in outstanding bond payments since the invasion of Ukraine on February 24. This is because widespread sanctions have effectively separated Russia from the global financial system, making many investors inaccessible to their assets.
The Kremlin reiterated that there was no reason for Russia to default, but could not send money to bondholders due to sanctions and the West tried to drive Russia into artificial default. I’m blaming you.
Russia’s efforts to avoid the first major defaults in international bonds since the Bolshevik Revolution over a century ago have effectively blocked Moscow payments by the Office of Foreign Assets Control (OFAC) of the U.S. Treasury Department5 I ran into an insurmountable obstacle in late May.
Dennis Franitzky, head of sovereign proceedings at law firm Quinn Emmanuel, told Reuters that “since March, we believed Russia’s default was probably inevitable. When was the problem?” rice field. “OFAC has intervened to answer that question for us, and the default is now for us.”
Formal defaults are largely symbolic, given that Russia cannot borrow internationally at this time and does not have to borrow thanks to its abundant oil and gas export revenues, but the stigma is probably its borrowing in the future. Will increase the cost.
The payment in question was interest on two bonds of $ 100 million, one denominated in US dollars and the other in euros, which Russia was due to pay on May 27. The payment grace period was 30 days and expired on Sunday.
Russia’s Treasury said it had paid euros and dollars to its National Settlement Vault (NSD), adding that it had fulfilled its obligations.
Some Taiwanese bondholders did not receive payments on Monday, sources told Reuters.
For many bondholders, not receiving the money borrowed in time from their account constitutes the default.
Lawyers say Russia may have to pay bondholders by the end of the next business day because the prospectus does not specify an exact deadline.
Small print
The legal situation surrounding bonds looks complicated.
Russian bonds are issued under unusually diverse conditions and were recently sold when Moscow was already facing sanctions in the 2014 Crimean Crisis and the 2018 UK poisoning case. The ambiguity is increasing.
Rodrigo Olivares-Caminal, Chairman of Banking and Financial Law at Queen Mary University of London, said that what constitutes an exemption from Russia’s obligations, or the difference between receiving and collecting payments, needs to be clarified.
“All these issues are subject to court interpretation, but Russia has not abandoned any of its sovereign immunity and is not subject to court jurisdiction in either of the two prospectuses,” Olivares- Caminal told Reuters.
In a sense, Russia is already the default.
The Derivatives Commission has determined that some securities have had a “credit event”. This triggered the payment of Russian credit default swaps, the products investors use to guarantee debt exposure to defaults. This was triggered by Russia’s failure to pay $ 1.9 million in accrued interest due in early April.
Until the invasion of Ukraine, sovereign defaults seemed unthinkable, and Russia was rated investment grade until just before that time. Defaults are also rare, as Moscow has the funds to repay its debt.
OFAC issued a temporary exemption known as General License 9A in early March to allow Moscow to continue paying investors. It expired on May 25 as Washington tightened sanctions on Russia and effectively blocked payments to US investors and businesses.
Revoked OFAC licenses are not the only obstacle Russia is facing, such as the European Union sanctions imposed on Russia’s Eurobond agent NSD in early June.
Moscow has recently been scrambling to deal with future payments and find ways to avoid defaults.
President Vladimir Putin began interim proceedings last Wednesday and signed a decree giving the government a 10-day grace period to select banks to process payments under the new scheme.
“Russia is not just telling Reuters that it is observing its obligations under the terms of its bonds,” Zia Uller, a partner and head of corporate crime and investigation at law firm Evershed Sutherland. “.
“If you are not satisfied as an investor, for example knowing that money is stuck in an escrow account, it will effectively have a practical impact on what Russia is saying, the answer. You do not meet the terms of the bond until you fulfill your obligations. “