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Russia default risk mounts as Moscow threatens ruble repayments

  • March 15, 2022
  • , Nikkei Asia , 3:56 a.m.
  • English Press



TOKYO — As deadlines approach for payments on Russian sovereign debt, concerns are growing that Moscow may in effect choose to default, as the loss of access to much of its foreign-currency reserves leaves the government with few options.


Russia has more than $100 million in coupon payments on dollar-denominated debt coming due Wednesday, with a 30-day grace period, which would put it in default if it fails to pay by April 15. Principal payments totaling $300 million and $2 billion are due March 31 and April 4, respectively.


“The total volume of our reserves is about $640 billion, and about $300 billion are in such condition that we can’t use them now,” Finance Minister Anton Siluanov said in an interview on state television.


Moscow is believed to be capable of making these payments in dollars using cash on hand. Western sanctions have not entirely cut it off from foreign-currency transactions, and companies have been able to cover interest on their debt.


But Siluanov threatened Sunday to pay bondholders in “unfriendly” countries in rubles until Russia’s central bank assets are unfrozen.


Japan’s Mizuho Research & Technologies estimates that 48.6% of foreign-currency reserves owned by Russia’s central bank are held in seven major economies that have frozen these assets, including the U.S., Japan and France. Meanwhile, inflows of foreign currency to the country are drying up as international companies halt operations there.


“If Russian sovereign or corporate debt enters default due to a shortage of foreign currency, that would risk further reducing confidence in and demand for the ruble, further intensifying inflationary pressure,” said Mizuho economist Yui Tamura.


President Vladimir Putin signed a decree last week permitting ruble payments to creditors from “countries that engage in hostile activities” against Russia, even when bond terms do not allow for that. Payments will be considered to be complete if they are made at the official exchange rate set by the central bank, potentially amounting to losses for investors given the currency’s precipitous decline.


Ratings agencies would likely treat such a move as a default or a selective default.


Major ratings agencies have already sharply downgraded Russian sovereign debt. S&P Global slashed its rating from BBB-, its lowest investment-grade tier, to CCC-, firmly in speculative-grade territory. Russian capital controls “will very likely restrict the ability of nonresident domestic and foreign currency bondholders to receive interest and/or principal payments on time,” the agency said.


The price of dollar-denominated Russian sovereign bonds due in 2047 has plunged roughly 90%, while the yield has skyrocketed from less than 10% to more than 60%.


There is a major logistical problem with the ruble payment plan: Two major clearing houses, Euroclear and Clearstream, have stopped accepting rubles as a settlement currency. Moscow is working around this by letting debtors set up special accounts in creditors’ names at local banks to handle settlements. But with sanctions continuing to tighten, it remains to be seen whether this will be acceptable to lenders.


Market watchers generally expect a default by Moscow to have a limited effect on the global financial system. Overseas investors hold a relatively small $20 billion in Russian foreign-currency sovereign debt.


Credit default swaps could pose a bigger risk. CDS sellers compensate buyers in the event of a debt default, providing a form of insurance. These derivatives, often sold by hedge funds, blur the picture of where risks related to Russian sovereign debt lie.


“How risks to the market are distributed is unclear. If financial institutions suffer unexpected losses via funds under their umbrella, that could lead to financial instability,” said Yasuo Sugeno of Daiwa Institute of Research’s London Research Center.


Sellers of credit default swaps ended up owing massive payouts to their buyers following the collapse of Lehman Brothers in 2008, which in turn exacerbated the global financial crisis.


Global financial markets also came under pressure after Russia defaulted on its debt in 1998. U.S. hedge fund Long-Term Capital Management, which had been selling U.S. bonds for Russian bonds, was driven to the brink of collapse.


“Central banks around the world launched drastic monetary easing measures back then, but a similar response would be difficult this time around given concerns over rising inflation,” said Manabu Tamaru at Barings Japan.

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