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| Russia's central Source: hank5/iStock/Getty Images Plus via Getty Images |
Russia is in danger of defaulting on sovereign debt due to sanctions related to its invasion of Ukraine, rating agencies have warned.
Payments on dollar- and euro-denominated Russian sovereign debt come due March 28, with an additional payment on principal March 31, totaling $549 million, according to a report by U.S. bank JPMorgan Chase & Co. Russia is then due to make a $2 billion-plus redemption payment April 4. International sanctions applied to Russia's central bank mean the country no longer has access to large swathes of its foreign currency reserves.
"We see a significant increased risk of default for Russia due to difficulties completing payments," S&P Global Ratings said in a March 23 report.
'Highly vulnerable'
An earlier payment to foreign investors holding local currency bonds due March 2 has not been received by bondholders due to technical difficulties related to sanctions. Fitch Ratings said this would constitute a default if payment did not reach bondholders within 30 days.
S&P Global Ratings, meanwhile, said debt service payments on Russia's eurobonds due in the next few weeks may face similar difficulties.
"At this point, we consider that Russia's debt is highly vulnerable to nonpayment," said S&P Global Ratings said March 17.
Interest payments of $65.63 million on bonds due March 21 were paid, the Russian Ministry of Finance said. It previously said March 17 that it had made debt repayments of $117.2 million on two dollar-denominated bonds due that week. The payment was late but within the 30-day grace period to April 15 allowed under the terms of the bond.
Russia's government has just over $39 billion in debt in foreign currency-denominated bonds, about $20 billion of which is owed to foreign investors, according to JPMorgan. Russian corporations owe $98 billion in eurobonds, of which $21.3 billion is owed to foreign investors.
A Russian presidential decree March 5 said bondholders in countries that had joined sanctions against Russia could be paid in rubles for foreign currency-denominated bonds. However, rating agencies anticipated problems arising as a result.
"If a payment is made in a currency not stipulated in the terms of the obligation, or in the place or manner prescribed by these terms, and we believe that the investor doesn't agree to the alternative payment, we could deem this a default," S&P Global Ratings said.
Fitch also said if bondholders were paid in rubles for foreign currency-denominated bonds, this would indicate a default or a default-like process had begun.
Bonds sold by Russia after its annexation of Crimea in 2014 contain a provision for alternative currency payments including U.S. dollars, euros and pounds sterling, while those sold after 2018 list rubles as an alternative currency.
International central securities depositaries Clearstream (owned by Deutsche Börse AG) and Euroclear SA/NV, where many bond trades are cleared and settled, have said they will no longer settle ruble-denominated transactions, making it difficult for international investors to sell their ruble-denominated assets.
Payment blocked
The U.S. initially blocked all transactions with Russia's central bank and finance ministry before later issuing a temporary exemption for bond payments. It subsequently decided to allow bondholders to collect payment on bonds until May 25, after which date a special license must be obtained from the Treasury.
The EU said no such restrictions apply. A spokesperson told S&P Global Market Intelligence that bondholders can continue to collect payment on Russian government bonds. The U.K. Treasury declined to comment.
Continuing to allow bond payments and redemptions from Russia weakens the sanctions regime, according to Ousmène Mandeng, visiting fellow in the School of Public Policy at the London School of Economics and Political Science.
"I find the fact that Russia was able to make the coupon payments utterly perplexing, to say the least, and severely undermining [to] the whole purpose of isolating Russia financially and impairing its ability to wage the war," he said via email. Mandeng is a former deputy division chief at the IMF who has decades of experience in the field of central bank reserve management.
S&P Global Ratings on March 17 lowered its long-term foreign and local currency sovereign credit ratings on Russia to CC from CCC-, following a number of ratings actions since the war began. Fitch on March 8 downgraded Russia's long-term foreign currency issuer default rating to C, reflecting Fitch's view that "a sovereign default is imminent."
Should Russia default, it would be its first major debt default in more than a century — since Lenin repudiated Tsarist debt after the 1917 Bolshevik revolution. Even after the collapse of the Soviet Union, Russia continued to service its foreign debt.