Russia has to make two dollar-denominated interest rate payments on its bonds today, but it is unclear whether Western investors will receive their cash, or whether a uniquely chaotic standstill awaits them.
In that case, Russia's first payout since 1998 would close an impressive turnaround. Before invading Ukraine, Russia was considered one of the most creditworthy countries in the world, with low debt levels and huge oil and gas exports.
But unprecedented Western sanctions aimed at cutting Russia off from the global financial system have sent the country's markets into free fall and complicated the debt service process.
Will Moscow pay?
Russia is scheduled to give investors a total of $ 117 million in interest payments on two of its bonds. He has a standard grace period of 30 days in which he will have to pay. If he does not pay, this would be a stoppage of payments.
The finance ministry said Monday it had ordered payments to be made normally, but added that its ability to do so could be hampered by Western sanctions against Russia's central bank. Finance Minister Anton Siluanov said the sanctions - imposed earlier this month - were sending the country into "artificial bankruptcy".
Markets have already largely discounted a stoppage of payments. Russia's foreign bonds are trading at about 20% of their face value - a level that indicates very little confidence that there will be a repayment. The rating agencies, which until the end of February had Russia in the status of investment grade, have downgraded it to the lowest levels of "junk", with Fitch Ratings saying that "bankruptcy" is "imminent".
In fact, there are many formal ways to file for bankruptcy, such as through court decisions, through rating agencies or through the financial institution's commercial body that decides whether investors can claim compensation for their insurance against bankruptcy.
If Russia pays in rubles, is it considered bankruptcy?
Siluanov said it was "absolutely fair" for Russia to pay its sovereign debt in rubles until sanctions were lifted, which he said had "frozen" almost half of the country's $ 643 billion in foreign exchange reserves.
But paying in Russian currency would still be bankrupt in the eyes of most Western investors, and not just because of the recent fall in the value of the currency. Six of Russia's 15 dollar or euro bonds include a "fallback" ruble repayment clause, but the two bonds whose coupons expire today are not among those bonds.
In any case, investors in Europe and the United States say sanctions - both by their own governments and those of Moscow - will make it virtually impossible to set up the Russian bank accounts needed to make payments in rubles. Lawyers say that even with the "window" of the alternative payment clause, a Russian declaration of suspension of payments is possible and it is almost inevitable that justice will be served.
How much debt is being played and who is holding it?
Today's payments directly affect Russian bonds in foreign currency worth $ 38,52 billion, of which about $ 20 billion are held by foreign investors. But foreigners also hold about 20 percent of Moscow's debt in local currency - which totaled about $ 200 billion before the war caused the ruble to collapse and make bonds virtually non-tradable.
The Russian government has already said that a recent coupon payment for these local bonds will not reach foreign holders, citing the central bank's ban on sending foreign currency abroad. This was already painful for Western asset management groups. More than twenty had to freeze funds with significant exposure to Russia, while others have sharply reduced the value of their Russian holdings.
What is the next step?
Bankruptcy is usually followed by a period of negotiation between the government and its bondholders to reach an agreement on debt restructuring. This is usually done by exchanging old bonds for new, less burdensome ones, which are either simply worth less, with lower interest payments or longer repayment schedules - or a combination of all three.
Investors are usually reluctant to go to court and file a formal default because this could cause the entire bond to expire and possibly cause default on other bonds where payments have not been lost.
But a "normal" restructuring seems unlikely in the case of Russia. The sanctions are designed to keep the country out of global bond markets and prevent Western investors from engaging in any new debt sales.
Instead, investors will probably have to wait, write off their Russian bonds and wait for a de-escalation in the conflict with Ukraine that could lead to a easing of sanctions. Some may want to vote quickly to demand immediate repayment and get court rulings from judges in the United States and the United Kingdom that allow them to try to seize Russian assets abroad to increase pressure on Moscow.
Meanwhile, some investors will hope that the failure to make interest payments will result in the payment of CDS - derivatives that look like collateral used to protect against default. The decision will be made by a "designation committee" of the financial sector, consisting of representatives of major banks and asset managers operating in the CDS market. However, exchanges may ultimately not help bondholders, as financial sanctions could hurt the complex system used to settle contracts.
Will a bankruptcy cause a financial crisis?
The aftermath of Russia's last bankruptcy in 1998 is great. Moscow's shock decision to devalue the ruble and default on its local debt came after the Asian financial crisis and shocked the financial markets, leading to the collapse of the US hedge fund Long-Term Capital Management, and its rescue by a consortium of banks. .
Even then, Russia continued to pay for its dollar-denominated bonds, but defaulted on some Soviet-era international bonds. The last complete external bankruptcy occurred in 1918, when the Bolshevik regime rejected the debts of the tsarist era after the Russian Revolution.
Analysts are relatively confident that a repeat of 1998 can be avoided. JPMorgan's Nikolaos Panigirtzoglou points out that foreign investors and banks have already reduced their exposure to Russia since the country annexed Crimea in 2014, in contrast to the mid-1990s, when high-leverage capital was loading Russian assets.
So far, the invasion of Ukraine has triggered only a modest transmission to other emerging markets, with the far more significant effects of the crisis being felt as commodity prices rise. However, the history of finance is replete with examples of how the unexpected side effects of widely anticipated events have led to wider disasters.
The 30-day grace period means that "it's probably not yet time to look at where the full pressures on the financial system are." . . However, this is clearly an important story to watch, "said Jim Reid, senior strategist at Deutsche Bank.
Source: Financial Times