Default or not? What we know in the case of Russia

Default or not? What we know in the case of Russia

A default by sanctions-hit Russia on its foreign debt looks less likely this week than had been feared, after a payment by Moscow. However, many questions remain unanswered.

– Why May 4 is a key date? –
“It’s the final deadline” for Russia to pay nearly $650 million to its creditors on two bonds maturing in 2022 and 2042, said Slim Souissi, a professor at France’s Caen university who specialises in banks and government failures.

Moscow should have paid by April 4 but US authorities had prevented it using dollars held in American banks in the wake of the Ukraine conflict.

The Russian government consequently announced that it would make payments on these bonds in rubles.

However, the contract made with creditors did not include payment in rubles, meaning Russia might be considered to be in default after the end of a 30-day grace period.

It would be the first default by Russia on foreign currency debt since 1918.

– Where are we? –
Russia’s finance ministry said Friday it had completed payments on the two dollar-denominated bonds without using funds held in a bank in the United States.

That was confirmed Tuesday to AFP by an official US source who said the move reduced the reserves that Moscow could call upon to finance the war.

The London branch of Citigroup bank, charged with distributing the dollars to creditors, had not confirmed Wednesday whether the payments had, in fact, been carried out.

But Bloomberg news agency said that three creditors had received money.

Souissi said he felt “confident” of a favourable outcome for Moscow — an opinion that appeared to be shared on the financial markets.

Prices for insurance — credit default swaps — for protection against the default of a Russian payment have declined significantly in recent days, a sign of less demand.

The CDDC international committee of creditors charged with activating or not the insurance said late Tuesday that it was continuing to watch the situation.

– What would happen in the event of default? –
When countries default “it limits their financial abilities usually for a very long time”, Tim Samples, associate professor of legal studies at the Terry College of Business at the University of Georgia, told AFP.

Greece was a case in point, having seen its access to the international bond markets cut for several years.

In the event of a default, Russia would lose access to an important source of financing or would be forced to pay prohibitive interest rates.

Effectively, Moscow already can no longer raise funds because of Western sanctions.

The announcement of a default is also crucial for holders of unpaid loans, who risk losing some or all of their money.

On the legal front too, the situation risks turning into a headache: Russia’s obligations are particularly unclear regarding the jurisdiction to settle disputes between lenders and borrowers, several law experts told AFP.

“The bonds are very unusual,” said Tim Samples.

The lack of clarity meant it was going to be a “messy dispute”, he added.

– What are the next deadlines for Moscow? –
While Russia is meeting the May 4 deadline, it is not out of the woods this year.

In 2022, the government still faces 13 deadlines.

The next one, on May 27, is for 100 million euros in interest on two bonds: One requires payment in dollars, euros, pounds or Swiss francs only; the other can be paid in rubles.

According to the finance ministry, Russia’s foreign debt amounts to between 4.5 and 4.7 trillion rubles (around 50 billion euros, $60 billion) — or 20 percent of the total public debt. (AFP)


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