Russian President Vladimir Putin attends the summit of the Organization of the Collective Security Treaty (TBT) at the Kremlin in Moscow, Russia, on May 16, 2022.
Serguei Guneev | Sputnik | via Reuters
The United States has announced that it will not extend an exemption that would allow Moscow to pay off foreign debt to U.S. investors in U.S. dollars, which could force Russia into default.
As of Wednesday, the U.S. Treasury Department had granted a key exemption to sanctions on Russia’s central bank that allowed it to process payments to dollar bond holders through U.S. and international banks, on a case-by-case basis.
This had allowed Russia to meet its previous debt repayment deadlines, although it had forced it to take advantage of its accumulated foreign currency reserve war chest to make payments.
However, the Treasury Department’s Office of Foreign Assets Control has allowed the exemption to expire as of 12:01 a.m. ET on Wednesday, it was announced in a bulletin Tuesday.
Russia has accumulated significant foreign exchange reserves in recent years and has the funds to pay, so it is likely to challenge any declaration of default on the grounds that it tried to pay but was blocked by the tightened sanctions regime.
Moscow has a deluge of terms for debt service this year, the first will be on Friday, when 100 million euros in interest must be paid on two bonds, one of which requires payment in dollars, euros, pounds or francs. Swiss while the other can be paid. in rubles.
Reuters and the Wall Street Journal reported on Friday that the Russian Ministry of Finance had already transferred funds to make those payments, but an additional $ 400 million in interest must be paid by the end of June.
In the event of non-payment, Russia will face a 30-day grace period before being declared in arrears.
Russia has not defaulted on its foreign currency debt since the Bolshevik revolution of 1917.
“Unknown territory”
Central to the consequences of the OFAC’s decision not to extend the waiver is the question of whether Russia will be considered in default.
Adam Solowsky, a partner in the financial firm of global law firm Reed Smith, told CNBC on Friday that Moscow will likely argue that it is not in arrears as payment was made impossible, despite having funds available.
“We’ve seen this argument before where OFAC sanctions have prevented payments from happening, the sovereign issuer has stated that they are not in arrears because they tried to make the payment and were blocked,” said Solowsky, who specializes in to represent the trustees in defaults and restructuring of sovereign bonds.
“Potentially they are looking at a protracted litigation scenario after the situation has been resolved as they try to determine if there was in fact a breach.”
Solowsky stressed that Russia’s situation is different from the usual sovereign default process, in which as a country approaches default, it restructures its ties with international investors.
“This will not be feasible for Russia at this time because, basically, under sanctions, no one can do business with them, so the normal scenario we would see is not what we would expect in this case,” Solowsky said.
He added that this will affect Russia’s access to global markets and may increase asset seizures both domestically and abroad.
“We are entering unfamiliar territory. This is a major world economy. I think we will see the effect of the fall in the coming days for many years to come,” Solowsky said.
Default “for years to come”
Timothy Ash, a senior emerging market strategist at BlueBay Asset Management, said in an email Tuesday that it’s only a matter of time before Moscow defaults.
“The right move of the OFAC, as this move will keep Russia in default for years to come, as long as Putin remains president and / or leaves Ukraine. Russia will only be able to leave the default when the OFAC allows it. “OFAC retains leverage,” Ash said.
“It simply came to our notice then [Former Chancellor of Germany] Schroeder at the time Russia was the last on the brink of a Paris Club default that big powers like Russia pay off their debts. Russia can no longer pay its debts because of its invasion of Ukraine. “
Ash predicted that Russia would lose most of its market access, even in China, due to default, as Moscow’s only financing would reach “exorbitant” interest rates.
“It means neither capital, nor investment, nor growth. Lower living standards, capital flight and brains. Russians will be poorer for a long time because of Putin.”
Ash suggested that this would increase Russia’s isolation from the global economy and reduce its superpower status to a level similar to that of “North Korea.”
‘Bridges burning’
Agathe Demarais, director of global economics at The Economist Intelligence Unit, told CNBC on Friday that as Russia’s sovereign debt is low and falling before the invasion, it enters what the ISU considers an inevitable default. it could be a big problem for Russia.
“For me, it’s really a sign of whether Russia believes that all bridges with the West and financial investors have been burned. Normally, if you’re a sovereign country, do your best to avoid default,” Demarais said.
“Every move we are making at the moment, at least for me, suggests that Russia is not really worried about a breach, and I think that’s because Russia really hopes that there will be no improvement in the system. the western countries soon “.
He added that punitive sanctions against Russia by the United States and Western allies are likely to remain in place “indefinitely,” as the false characterization of the Kremlin invasion as a “de-Nazifying” effort means it cannot turn easily.
The ISU predicts a year-long hot war and a protracted conflict afterwards, as Russia and the West try to reconfigure supply chains to accommodate the new sanctions regime rather than find ways to end it.
Russia is still attracting substantial amounts of cash from energy exports and is trying to force European importers to pay for oil and gas in rubles in order to circumvent sanctions.
“What this really shows is that Putin’s burning bridge strategy feels like he has nothing left to lose,” Demarais added.