Bloomberg reported that the 30-day grace period for the May coupon payments on Eurobonds of the RF Ministry of Finance, which for some reason did not reach foreign holders of securities, has expired, and that now Russia has defaulted “for sure”, “for the first time since 1918” on its external obligations
Russian Treasury does not agree with this statement: the May payments were made several days ahead of schedule, before the US Treasury OFAC license was terminated. The Russian agency reports that foreign investors did not receive payments due to the actions of foreign settlement and clearing systems and, in accordance with the issue documentation, this is not considered the reason for the announcement of the issuer’s default.
This is the second attempt in the last month to declare a default on the Russian external debt. The previous one was made in early June, when the non-payment of additional interest in the amount of $1.9 million acted as a credit event: they arose on the April payment, due to the fact that it was made not on the planned date, but at the end of the grace period. This curious amount fell far short of $75 million, the threshold above which a cross-default is declared on other external obligations of the issuer. Therefore, the first attempt to declare Russia’s default on its external debt quickly left the information space. The second one is more significant in terms of its size – the total payment for the two issues on May 27 amounted to almost $98 million.
The Bloomberg note is not an official default announcement. This could have been done by foreign rating agencies, but they stopped their activities in Russia back in April. Although at that time one of the agencies, S&P, in violation of its own methodology, had already downgraded the credit rating of the Russian Federation to SD (selective default), despite the fact that a credit event had not yet occurred at the time of rating withdrawal.
The declaration of default on Eurobonds of the RF Ministry of Finance in the current conditions was only a matter of time. After OFAC’s license was not renewed at the end of May, we were no longer able to use foreign financial infrastructure to make payments. Therefore, subsequent scheduled payments on issues that do not explicitly include the option of ruble payments would be made in violation of the issue documentation, and this could be considered by Eurobond holders as a default.
On June 23 and 24, the Ministry of Finance of the Russian Federation was supposed to make payments on three issues, and only one of them had an option for ruble payments. The Ministry of Finance made these payments in rubles in accordance with the temporary procedure, which was introduced unilaterally by decree of the President of the Russian Federation, without coordination with Eurobond holders.
Therefore, if the foreign financial infrastructure had made May payments on Eurobonds, then the topic of a Russian default would still have arisen – not now, but at the end of July, after the end of the grace period for payments made last week. At the same time, we would consider our obligations fulfilled. And here is the question for foreign investors, what is more important for them: the return of their own investments through the adoption of new rules of the game, or compliance with all the formalities to the end, with the recognition of default and attempts to return their investments through the courts.
Against the backdrop of already existing restrictions and sanctions, the default will not create any new, significant problems for the Russian economy. It should be understood that the nature of the current default is fundamentally different from the events that took place in 1998 and which the majority of Russian citizens associate with the term “default”. Let me remind you that at that time the pyramid of government short-term bonds collapsed – in the conditions of a narrow currency corridor they brought high returns to investors, while Russia had practically no foreign exchange reserves due to low oil prices and the functioning of the economy was heavily dependent on IMF loans.
Now the situation is completely different. The favorable situation in the commodity markets and the formation of significant gold and foreign exchange reserves over the past 15–18 years have significantly reduced the importance of the global capital market for the RF Ministry of Finance. In recent years, the external public debt compared to the gold and foreign exchange reserve was insignificant, and in general, the country’s external debt (taking into account the debt of corporations and banks) was comparable to the size of the gold reserves. At the beginning of April, the national debt on Eurobonds was $37 billion, while the non-frozen gold reserves were at the level of $300 billion. I would like to note that the owners of half of the Eurobonds of the RF Ministry of Finance were residents.
Right now, Sri Lanka is in default. Pakistan is on the verge of declaring bankruptcy, and Argentina recently applied to the IMF for a debt restructuring. The situation of these countries is fundamentally different from ours. Sri Lanka defaulted as its currency fell critically: the country imports food, fuel and suffers from a lack of tourism due to the pandemic. Pakistan also has trade balance problems.
We also have opportunity and willingness to pay, but foreign financial infrastructure refuses to make payments. Therefore, this is not a default of us as a debtor, but a default of the financial infrastructure.
Alexander Shurakov, Izvestia newspaper
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