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2022 Russian debt default

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Russian bonds, Inverted yield curves to tame inflation during their wars (Russo-Georgian War, Russo-Ukrainian War, 2022 Russian invasion of Ukraine)
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Russia defaulted on part of its foreign currency denominated debt on 27 June 2022, because of funds being stuck in Euroclear.[1] This was its first such default since 1918, back then it was just ruble-denominated bonds, not foreign currency debt).[2][3] Before that, on 2 June, Russia defaulted on the 30-day interest, incorrectly not counting interest for the grace period,[4] but a failure to pay $1.9 million was not sufficient to trigger a cross-default across other instruments, because the minimum threshold is an amount of at least $75 million, according to documents for other Russian eurobonds.[5] The default occurred due to technicalities as the payment in dollars was impossible due to the sanctions by US and EU authorities,[6] but did not mark an actual lack of capability to pay its debts.

Background[edit]

Further information: International sanctions during the 2022 Russian invasion of Ukraine and SWIFT ban against Russian banks

The United States Treasury Department in February 2022 moved to cut off Russia from the global economy after the 2022 Russian invasion of Ukraine, announcing that it would immobilize Russian central bank assets that are held in the United States and impose sanctions on the Russian Direct Investment Fund.[7] The $284 billion or more in frozen assets is nearly half of the $585 billion that Russia had stockpiled as of June 2021.[8]

The Biden administration initially allowed Russia to continue to repurpose the substantial funds it has kept in U.S. financial institutions to make required payments on its sovereign debt. But on April 4, the Treasury Department banned Russia from withdrawing funds held in US banks to pay off its debt obligations.[9]

On 4 April 2022, Russia technically defaulted on its foreign debt by failing to pay its obligations in US dollars (and after the grace period it actually defaulted because it did not pay 30 days grace period interest of around 1.9 million USD). On 8 April, the credit agency S&P Global predicted that Russia will inevitably be in "selective default on foreign currency obligations"[10] (NR rating after CC rating[11]) because it tried to pay obligations on dollar denominated debt in rubles, which could not be converted into "dollars equivalent to the originally due amounts", since every government can just "print money" in the currency it controls. A selective default occurs if a borrower defaults on specific (foreign, or more accurately, "foreign currency") obligations but not all of its debt.[12][13][14]

Two dollar denominated bonds issued by the Russian government matured on 4 April 2022.[12] On 5 April, Russia attempted to pay its bondholders with dollars from $600 million of reserves held in US banks, but these were blocked by the US as part of the sanctions against Russia for its invasion of Ukraine.[15]

The Russian government had a 30-day grace period to meet its contractual obligations, but S&P Global stated that it expects that investors will not be able to convert rubles into “dollars equivalent to the originally due amounts” and sanctions will reduce Russia's "willingness and technical abilities to honor the terms and conditions" of the loans.[12]

Previously, on 16 March, Russia managed to pay through a new method[16] (acting on a general license issued by the US Office of Foreign Assets Control, which was valid until May 25) and thus avoided technical default,[17][18] it also threatened to sue if forced into default[19][20] or use cryptocurrency.[21]

Earlier, Russian Minister of Finance Anton Siluanov said that Russia would repay its foreign currency debt only if its foreign currency accounts were unfrozen.[22] On 29 April, Russia's Finance Ministry said that it made an attempt to repay US$649.2 million on Russia-2022 and Russia-2042 Eurobonds (in dollars through non-sanctioned Bank Dom.RF JSC [ru] to Bank of New York Mellon Corp. and then to Citibank N.A., London branch[23]), but it was not clear if the payments would reach the recipients and Russia would avoid default.[24] On 4 May, US and UK regulators cleared the payments[25] with a technical date of 2 May.[4]

Five days before the May 25 license expired, Russia again managed to pay on Russia-2026 and Russia-2036 Eurobonds but did not avoid falling into the grace period,[26] because its money got stuck in Euroclear (that was classified as an actual default by Moody's 30 days later on 27 June).[1] It paid US$71.25 million for a dollar-denominated eurobond and 26.5 million euros ($28 million) for euro-denominated notes. The next payments after the due on 27 May one were $235 million across two Eurobonds due on June 23.[27][28]

The 30-day grace period still required interest to be paid, so at the end of May the money paid on 29 April (and got into Citibank N.A. on 2 May) was about 1.9 million USD short, and the technical default from 4 April was converted into a real default, as recognized when 13 members of the Credit Derivatives Determinations Committee for Europe voted on 1 June, only one of them (Citibank N.A.) voting in favour of Russia.[4]

A default for the purposes of CDS contracts "occurs once the determination committee votes for a credit event, which has now happened," said Gabriele Foa, portfolio manager of the Global Credit Opportunities Fund at Algebris.[29] "Of course…it is a very small amount, so the definition of default is very technical. If, as it seems, it is not possible for foreign investors to receive dollars starting May 25, the default will soon be more material."

Finance Minister Anton Siluanov dismissed the default status as a "farce", since Russia has plenty of dollar and euro funds to repay the debt. Associated Press reported that the official default on Russian's foreign debt would take time to be confirmed. Financial analysts described Russia's situation as unique, since it has extensive amounts of cash to fulfill its debt obligations and very small foreign debt compared to USA.[30][31]

Russian default on foreign debt[edit]

See also: Economic impact of the 2022 Russian invasion of Ukraine

On Monday 27 June 2022, Moody's rating agency declared that Russia defaulted on its foreign debt after missing a payment deadline the preceding Sunday.[32]

Post default events[edit]

In September 2023 a Russian USD denominated bond with a value of $3 billion became repayable. Repayment was made in rubles, with the Russian National Wealth Fund selling currencies to offset any bond owners who needed to sell their rubles, so supporting the ruble FX rate.[33]

See also[edit]

References[edit]

  1. ^ Jump up to: a b "Investors have not received Russian Eurobond payments because of third-party actions; there is no default according to issue documentation - Finance Ministry". interfax.com. Retrieved 1 March 2023.
  2. ^ Giulia Morpurgo; Libby Cherry (June 27, 2022). "Russia Defaults on Foreign Debt for First Time Since 1918". Bloomberg News.
  3. ^ King, Ben; Jordan, Dearbail (27 June 2022). "Russia in debt default as payment deadline passes". BBC. Retrieved 27 June 2022.
  4. ^ Jump up to: a b c "Credit Derivatives Determinations Committee » The Russian Federation". www.cdsdeterminationscommittees.org. Retrieved 2022-06-03.
  5. ^ "Russia Fails to Meet Bond Obligations, Triggering Swaps Payout". Bloomberg.com. 1 June 2022. Retrieved 1 March 2023.
  6. ^ "West pushes Russia into its first foreign debt default since 1918". CNN. 28 June 2022. Retrieved 29 April 2023.
  7. ^ Rappeport, Alan (28 February 2022). "U.S. Escalates sanctions with a freeze on Russian central bank assets". The New York Times.
  8. ^ Hersher, Monica; Murphy, Joe (17 March 2022). "Graphic: Russia stored large amounts of money with many countries. Hundreds of billions of it are now frozen". The Data Point. NBC News.
  9. ^ Stein, Jeff; Gregg, Aaron (5 April 2022). "U.S. impedes Russia's debt payments as new sanctions package emerges". The Washington Post. ISSN 0190-8286. Retrieved 2022-04-30.
  10. ^ "S&P cuts Russia's foreign currency rating to 'selective default'". Reuters. 2022-04-09. Retrieved 2022-04-29.
  11. ^ "S&P cuts Russia's ratings to 'CC' on debt default risk". Reuters. 2022-03-17. Retrieved 2022-04-29.
  12. ^ Jump up to: a b c Cooban, Anna (11 April 2022). "Russia has defaulted on its foreign debt, says S&P". CNN Business.
  13. ^ Nelson, Eshe (April 10, 2022). "S&P Global Places Russia in 'Selective Default'". The New York Times.
  14. ^ Wile, Rob (11 April 2022). "Russia slips into 'selective default' on some foreign debt". NBC News.
  15. ^ Davies, Megan; Alper, Alexandra (April 5, 2022). "U.S. stops Russian bond payments, raising risk of default". Reuters.
  16. ^ Утвержден временный порядок исполнения государственных долговых обязательств Российской Федерации в иностранной валюте. minfin.gov.ru (in Russian). Retrieved 2022-04-29.
  17. ^ "Press review: Russia avoids technical default and US may remove IRGC from terror list". TASS. 18 March 2022. Retrieved 2022-04-29.
  18. ^ "Russia Avoids Technical Default, But Faces $4.6bn In Payments for 2022". Market News. 2022-03-18. Retrieved 2022-04-29.
  19. ^ Tan, Huileng (11 April 2022). "Russia says it will sue if forced into a default — which would be the country's first external sovereign debt default in over a century". Business Insider. Retrieved 2022-04-29.
  20. ^ Mozée, Carla (11 April 2022). "Russia plans to sue to regain access to $300 billion in frozen foreign currency reserves". Markets Insider. Retrieved 2022-04-29.
  21. ^ Evans, Brian (22 April 2022). "Russian central bank chief denies Moscow is at risk of default and touts digital ruble for international payments". Business Insider. Retrieved 2022-04-29.
  22. ^ "Russia's Finance Ministry fulfils Eurobonds obligations for $649.2 mln in rubles". TASS. 6 April 2022.
  23. ^ "Russia Says It Made Sovereign Bond Payments in U.S. Dollars". Bloomberg.com. 2022-04-29. Retrieved 2022-05-04.
  24. ^ Clinch, Matt; Smith, Elliot (2022-04-29). "Russia aims to avert historic debt default with last-ditch dollar bond payments". CNBC. Retrieved 2022-04-30.
  25. ^ Cherry, Libby; Morpurgo, Giulia; Pronina, Lyubov (2022-05-03). "Russia Dodges Default as Some Investors Receive Dollar Funds". Bloomberg.com. Retrieved 2022-05-04.
  26. ^ "Russia's Whipsaw Week Ends With Default Clock Ticking". Bloomberg.com. 2022-05-28. Retrieved 2022-08-28.
  27. ^ Strohecker, Karin (2022-05-20). "Russia makes early debt payment dash to dodge default". Reuters. Retrieved 2022-05-25.
  28. ^ "Update: New Mechanism Established for Repayment of Russian Sovereign Debt". www.morganlewis.com. Retrieved 2023-03-01.
  29. ^ "Teetering on default, Russia misses $1.9-million payment, committee determines". RAPPLER. 2 June 2022. Retrieved 3 June 2022.
  30. ^ "Russia Defaults on Foreign Debt for First Time Since 1918". Bloomberg News. Retrieved 27 June 2022.
  31. ^ "What's the impact of a Russian debt default?" AP News. Retrieved 27 June 2022.
  32. ^ Strohecker, Karin; Shalal, Andrea; Chan, Emily (27 June 2022). "Russia in historic default as Ukraine sanctions cut off payments". Reuters. Retrieved 27 June 2022.
  33. ^ "Bank of Russia comments on FX market operations". 6 September 2023.
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