Russia could be headed for its first foreign-currency debt default in more than a century if it goes ahead with a plan to pay interest on dollar bonds in rubles.
While US$117 million coupon payments on two dollar-denominated bonds due Wednesday are being processed, Finance Minister Anton Siluanov reiterated that there is a risk the dollar transfer may not be completed.
Russia sent the instruction for the payment to the US bank that normally handles the transactions, but the ministry has received neither a rejection nor a confirmation, he said, according to the RIA Novosti news service.
If the transfer fails, the payment will be made in rubles, he said this week. Fitch Ratings said on Tuesday that making a settlement in any currency other than the dollar within the 30-day grace period would be considered a default. S&P Global Ratings made a similar statement this month.
The coupon payment could be another turning point for Russia, which in the weeks after the Ukraine invasion lost its investment-grade ratings and became the world’s most sanctioned nation. Russia’s finance minister has repeatedly warned that without access to its foreign reserves, it will have to make the payment in rubles, outlining a process that involves transferring the cash to local accounts.
“Even if it is anticipated, a default would have a domino effect on the financial industry”, Mohit Kumar, a strategist at Jefferies in London, said in an emailed note. “Russia had an investment grade rating not too long ago, so it would be in the investable universe for a number of investors.”
Settle coupons in local currency is particularly problematic for these two securities, neither of which have ruble backing options that would have allowed local currency settlements. Some of Russia’s Eurobonds have that option.
If rating agencies or bodies such as credit derivative determination committees decide that a ruble payment for the two bonds constitutes a credit event, Russia would be officially in default if it does not pay the dollar coupon before a grace period of 30 days.
It would be the country’s first foreign-currency bond default since the Bolsheviks refused to pay or acknowledge the tsar’s debts a century ago. In 1998, Russia defaulted on a local currency debt and declared a moratorium on payments on its foreign currency bonds.
“We believe that Russia will be isolated for a long time,” said Mark Dowding, chief investment officer at BlueBay Asset Management. “Regime change in Russia is probably a requirement for many to reinvest, along with the lifting of sanctions.”
However, Russia’s bond drama has an impact on emerging markets as a whole. The Bloomberg Emerging Markets Hard Currency Aggregate Index has fallen 5% since the start of the war, nearly double the drop in global junk bonds.
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