Business Maverick: Russia Slips Into Historic Default as Sanctions Muddy Next Steps

2022/06/27 19:19:00

Russia defaulted on its external sovereign bonds for the first time in a century, the culmination of ever-tougher Western sanctions that shut down payment routes to overseas creditors.

Russia defaulted on its external sovereign bonds for the first time in a century, the culmination of ever-tougher Western sanctions that shut down payment routes to overseas creditors.

Russia defaulted on its external sovereign bonds for the first time in a century, the culmination of ever-tougher Western sanctions that shut down payment routes to overseas creditors.

For months, Russia had found paths around the penalties imposed after the Kremlin’s invasion of Ukraine.27 June 2022 - 12:15 Karin Strohecker, Andrea Shalal and Emily Chan Picture: 123RF/BLUE BAY London/Taipei — Russia defaulted on its foreign sovereign bonds for the first time since the Bolshevik revolution, as sweeping sanctions effectively cut the country off from the global financial system and rendered its assets untouchable to many investors.26 June 2022 - 06:07 By Reuters Russian forces fully occupied the eastern Ukrainian city of Sievierodonetsk on Saturday, both sides said, confirming Kyiv's biggest battlefield setback for more than a month after weeks of some of the war's bloodiest fighting.Berlin moves closer to energy emergency as Russia cuts gas flow 26 June 2022 - 00:00 By Reuters Germany triggered the “alarm stage” of its emergency gas plan this week in response to falling Russian supplies but stopped short of allowing soaring energy costs to hurt customers in Europe's largest economy.

But at the end of the day on Sunday, the grace period on about $100 million of trapped interest payments due May 27 expired, a deadline considered an “Event of Default” if missed.The route to this point has been far from normal, as Russia has the resources to pay its bills — and tried to do so — but was blocked by the sanctions.The official was speaking to reporters as the White House released a fact sheet detailing potential G7 actions to support Ukraine and further stem Moscow’s oil revenues.Those restrictions also mean there’s huge uncertainty about what comes next, and about how investors can go about getting their money.The fall of Sievierodonetsk — once home to more than 100,000 people but now a wasteland — was Russia's biggest victory since capturing the port of Mariupol last month.“With Russia benefiting from the high price of its energy exports, it clearly has both the means and the desire to pay its foreign debt,” said Giles Coghlan, chief analyst at HYCM Group.Earlier, some bondholders said they had not received overdue interest on Monday after the expiry of a key payment deadline a day earlier.It’s a “default in a technical sense, so many investors may be prepared to wait it out.Already subscribed? Simply sign in below.

” Given the damage already done to the economy and markets, the default is also mostly symbolic for now, and matters little to Russians dealing with double-digit inflation and the worst economic contraction in years.The Kremlin has repeatedly said there are no grounds for Russia to default but it is unable to send money to bondholders because of sanctions, accusing the West of trying to drive it into an artificial default.President Volodymyr Zelensky vowed in a video address that Ukraine would win back the cities it lost.But still, it’s a grim marker in the country’s rapid transformation into an economic, financial and political outcast.The nation’s eurobonds have traded at distressed levels since the start of March, the central bank’s foreign reserves remain frozen, and the biggest banks are severed from the global financial system.“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.Russia has pushed back against the default designation, saying it has the funds to cover any bills and has been forced into non-payment.“They are trying to establish their own order.As it tried to twist its way out, it announced last week that it would switch to servicing its $40 billion of outstanding sovereign debt in rubles, criticizing a “force-majeure” situation it said was artificially manufactured by the West.” A formal default would be largely symbolic given Russia cannot borrow internationally at the moment and doesn’t need to thanks to plentiful oil and gas export revenues.

Russia’s last sovereign default occurred in 1998, during the nation’s financial collapse and ruble devaluation.At the time, Russia avoided defaulting on its foreign eurobonds, although President Boris Yeltsin’s government reneged on $40 billion of ruble-denominated debt, and also missed payments on dollar notes issued by state-owned Vnesheconombank.The payments in question are $100m in interest on two bonds, one denominated in US dollars and another in euros, Russia was due to pay on May 27..While those bonds were issued after an agreement with the so-called London Club in 1997 to restructure Soviet-era debt held by Western banks, they were technically obligations of Vnesheconombank rather than the Russian Federation, according to a paper published by the International Monetary Fund.In May 1999 the government also defaulted on a Soviet-era dollar bond, known as the MinFin III that was domestically issued, but was widely held by foreign investors.Russia’s finance ministry said it made the payments to its onshore National Settlement Depository (NSD) in euros and dollars, adding it has fulfilled obligations.According to Lee Buchheit and Elena Daly, sovereign debt lawyers who provided advice to Russia during its 1990s restructuring, while the country did restructure some of its debt then, that didn’t include its Eurobonds at the time.“Given the conditions, holding the defence in the ruins and open fields is no longer possible.

“MinFins, while denominated in dollars, were governed by Russian law and therefore could be viewed as internal debt,” they said.With no exact deadline specified in the prospectus, lawyers say Russia might have until the end of the after business day to pay the bondholders.The last time Russia fell into direct default vis-a-vis its foreign creditors was more than a century ago, when the Bolsheviks under Vladimir Lenin repudiated the nation’s staggering Czarist-era debt load in 1918.By some measures it approached a trillion dollars in today’s money, according to Hassan Malik, senior sovereign analyst at Loomis Sayles & Company LP.Russia’s bonds have been issued with an unusual variety of terms, and an increasing level of ambiguities for those sold more recently, when Moscow was already facing sanctions over its annexation of Crimea in 2014 and a poisoning incident in Britain in 2018.Ukrainian service members walk in the industrial area of the city of Sievierodonetsk, as Russia's attack on Ukraine continues, Ukraine June 20, 2022.By comparison, foreigners held the equivalent of almost $20 billion of Russia’s eurobonds as of the start of April.A formal default declaration would usually come from ratings firms, but European sanctions led to them withdrawing ratings on Russian entities.“All these issues are subject to interpretation by a court of law, but Russia has not waived any of its sovereign immunity and has not submitted to the jurisdiction of any court in any of the two prospectuses,” Olivares-Caminal told Reuters.

According to the bond documents, holders can call one themselves if owners of 25% of the outstanding bonds agree that an “Event of Default” has occurred.But he made no mention of those forces putting up any direct resistance.Finance Minister Anton Siluanov dismissed the situation on Thursday as a “farce.A committee on derivatives has ruled a “credit event” had occurred on some of its securities, which triggered a payout on some of Russia's credit default swaps — instruments used by investors to insure exposure to debt against default.” He also said it makes little sense for creditors to seek a declaration of default through the courts because Russia hasn’t waived its sovereign immunity, and no foreign court would have jurisdiction.“If we ultimately get to the point where diplomatic assets are claimed, then this is tantamount to severing diplomatic ties and entering into direct conflict,” he said.9m payment in accrued interest on a payment that had been due in early April.At least three people were killed in the town of Sarny, some 185 miles (300km) west of Kyiv, after rockets hit a car wash and a car repair facility, said the local regional military administration.“And this would put us in a different world with completely different rules.

We would have to react differently in this case — and not through legal channels.A default would also be unusual as Moscow has the funds to service its debt.” The 30-day grace period was triggered when investors failed to receive coupon payments due on dollar- and euro-denominated bonds on May 27.Seeking to tighten the screws on Russia, U.Bondholders have time to assess the situation: the claims only become void three years on from the payment date, according to the bond documents.It let it expire on May 25 as Washington tightened sanctions on Russia, effectively cutting off payments to US investors and entities.With payments blocked, Vladimir Putin introduced new regulations that say Russia’s obligations on foreign-currency bonds are fulfilled once the appropriate amount in rubles has been transferred to the local paying agent.The Finance Ministry made its latest interest payments, equivalent to about $400 million, under those rules on Thursday and Friday.Moscow has scrambled in recent days to find ways of dealing with upcoming payments and avoid a default.A German government source said G7 governments also were having “very constructive” conversations on a possible price cap on Russian oil imports.

However, none of the underlying bonds have terms that allow for settlement in the local currency.So far, it’s unclear if investors will use the new tool and whether existing sanctions would even allow them to repatriate the money.“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.“Is it a justifiable excuse to say: ‘Oh well, the sanctions prevented me from making the payments, so it’s not my fault’?” said Malik, who is also author of ‘Bankers and Bolsheviks: International Finance and the Russian Revolution.Yesterday we could not take it any more,” she said.’ “The broader issue is that the sanctions were themselves a response to an action on the part of the sovereign entity,” he said, referring to the invasion of Ukraine.” Reuters Would you like to comment on this article or view other readers' comments? Register (it’s quick and free) or sign in now.“And I think history will judge this in the latter light.

”.“48 cruise missiles.

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