Russia says it ordered payment of its debt, but does not guarantee payment for sanctions

Russia assured that it has given the order to pay the interest on its debt in dollars that was due this Wednesday, US$ 117.2 million, although it has specified that it cannot guarantee that the final creditor will receive the payment due to the impact of the sanctions imposed on that country for the invasion of Ukraine.

“The possibility or impossibility of fulfilling our obligations in foreign currency does not depend on us, we have the money and we have made the payment. Now the ball is in America’s court”, said the Russian Finance Minister, Anton Siluanovto the RT media group.

Moscow would incur the first non-payment of foreign debt since the Bolshevik Revolution of 1917 for not paying the coupon of this issue in the established terms.

In addition, the rating agency Fitch has announced that it considers the payment of the coupon of this debt issue in rubles instead of in dollars to be equivalent to a suspension of payments, although Russia still has a grace period of 30 days to meet its obligations, until mid-April.

“We already gave the payment order, now the ball is in the court of the US authorities, first of all”, said the minister, who assured that he cannot guarantee that the final investor will obtain the payment due to the impact of the sanctions that Western countries have imposed on Russia for the invasion of Ukraine.

The head of Russian Finance believes that it is up to Western countries, mainly the United States, to withdraw these funds from dollar accounts that have been frozen to Russia by sanctions.

These are the first coupons in foreign currency that expire after the change in regulations made by the Government of the President of Russia, Vladimir Putin, on March 5.

Fitch advances the possibility of further lowering the rating

Fitch argues that its decision to equate the default in dollars to the suspension of payments is consistent with the reduction of Russia’s long-term debt that it decided on March 8, when it described the country’s emissions as “extremely speculative” and at risk of bankruptcy or default (level C).

The C level in the long-term debt ratings is 19 steps below the maximum note, triple A, which is held by countries such as the United States, Germany and several countries in its financial sphere (Sweden, Norway, Denmark, the Netherlands and Luxembourg, among others). Spain is rated A-.

The rating entity clarifies that non-payment in dollars would imply a downgrading of these issues to restricted payment suspension (D), a rating that will also be given to long-term debt at the end of the grace period, one notch below that granted on March 8.

The Russian government owes some $40 billion in bonds denominated in dollars and euros, half of which is held by foreign investors.

Russia defends that the sanctions that exclude the country from the international financial system prevent it from paying in a currency other than the ruble, which it considers an acceptable means of payment.

Does not yet imply systemic risk

Analysts say that a default by Russia on its debt commitments does not yet represent a systemic risk, due to the limited exposure to the country’s assets, given that many international investors left the country after the annexation of Crimea, in 2014, although it will be necessary to analyze in detail who are the holders of the Russian debt.

The non-payment could precipitate chain bankruptcies in those investors with strong positions in Russian assets and in ETF debt (funds that trade in real time), some of which are invested in the stock market and debt of that country, said Juan Ignacio Crespo , market analyst.

Crespo also says that the “cross default” clause, which is usually included in all debt issues, implies that the moment a coupon is not paid, the entire issue of that debt automatically expires, so that the holders of these Russian bonds will have to provision not only what was due this Wednesday but also the entire investment.