Russia pushed to historic default by sanctions By Reuters
© Reuters. FILE PHOTO: The Spasskaya tower clock showing the time at noon is pictured next to the Moscow Kremlin and St. Basil’s Cathedral, March 31, 2020. REUTERS/Maxim Shemetov
By Karin Strohecker, Andrea Shalal and Emily Chan
LONDON (Reuters) – Russia has defaulted on its international obligations for the first time in more than a century, the White House said, as sweeping sanctions have effectively cut the country off from the global financial system, rendering its assets untouchable.
The Kremlin, which has the money to make payments from oil and gas revenues, quickly dismissed the demands and accused the West of driving it into artificial default.
Earlier, some bondholders said they did not receive late payment interest on Monday after a key payment deadline expired on Sunday.
Russia has struggled to keep payments on $40 billion in bonds outstanding since its February 24 invasion of Ukraine.
“The news this morning around the discovery of Russia’s default, for the first time in more than a century, situates just how strong the actions that the United States, along with its allies and partners, have taken, as well as the dramatic impact on Russia’s economy,” the US official said on the sidelines of a G7 summit in Germany.
Russia’s efforts to avoid what would be its first major default on international obligations since the Bolshevik Revolution more than a century ago hit a snag in late May when the Office of Foreign Assets Control (OFAC) of the US Treasury Department effectively blocked Moscow from making payments.
“Since March, we thought a Russian default was probably inevitable, and the question was when,” Dennis Hranitzky, head of sovereign litigation at law firm Quinn Emanuel, told Reuters ahead of Sunday’s deadline.
“OFAC stepped in to answer that question for us, and the default is now on us.”
A formal default would be largely symbolic given that Russia cannot borrow internationally at the moment and does not need to thanks to abundant oil and gas export revenues. But the stigma would likely increase its borrowing costs in the future.
The payments in question are $100 million in interest on two bonds, one denominated in US dollars and the other in euros, which Russia was due to pay on May 27. The payments had a 30-day grace period, which expired on Sunday.
The Russian Finance Ministry said it had made payments to its onshore National Settlement Depository (NSD) in euros and dollars, adding that it had fulfilled its obligations.
In a call with reporters, Kremlin spokesman Dmitry Peskov said the fact that payments were blocked by Euroclear due to Western sanctions against Russia was “not our problem”.
The Euroclear clearinghouse did not respond to a request for comment.
Some Taiwanese bondholders had not received payments on Monday, sources told Reuters.
With no exact deadline specified in the prospectus, lawyers say Russia could have until the end of the next business day to pay those bondholders.
Credit rating agencies usually formally downgrade a country’s credit rating to reflect a default, but this does not apply in the case of Russia, as most agencies no longer rate the country.
The legal situation surrounding the bonds seems complex.
Russian bonds have been issued with an unusual variety of terms and an increasing level of ambiguity for those sold more recently, as Moscow was already facing sanctions for its 2014 annexation of Crimea and a poisoning incident in Great Britain. -Brittany in 2018.
Rodrigo Olivares-Caminal, chair of banking and finance law at Queen Mary University of London, said there was a need to clarify what constituted a discharge for Russia from its obligation, or the difference between receiving and recovering payments.
“All of these issues are subject to interpretation by a court,” Olivares-Caminal told Reuters.
In some respects, Russia has already been at fault.
A derivatives committee ruled that a ‘credit event’ had occurred on some of the Russian securities, triggering a payout on some of the Russian credit default swaps – instruments used by investors to s insure against non-payment.
It was triggered by Russia failing to make a payment of $1.9 million in accrued interest on a payment that was due in early April.
Until the invasion of Ukraine, a sovereign default seemed unthinkable, with Russia achieving an investment grade rating shortly before that point. A default would also be unusual because Moscow has the funds to service its debt.
The US Treasury’s OFAC had issued a temporary waiver, known as General License 9A, in early March to allow Moscow to continue paying investors. The United States let the waiver expire on May 25 as Washington tightened sanctions against Russia, cutting off payments to American investors and entities.
The expired OFAC license is not Russia’s only obstacle. In early June, the European Union imposed sanctions on the NSD, Russia’s designated agent for its Eurobonds.
Moscow has been trying in recent days to find ways to manage upcoming payments and avoid a default.
President Vladimir Putin signed a decree last Wednesday to launch temporary procedures and give the government 10 days to choose banks to handle payments under a new regime, suggesting that Russia will consider its obligations fulfilled when it will pay bondholders in rubles and onshore in Russia.
“Russia saying it’s meeting its obligations under the terms of the bond isn’t the whole story,” Zia Ullah, partner and head of corporate crime and investigations at the law firm, told Reuters. Eversheds Sutherland lawyers.
“If you as an investor are not satisfied, for example, if you know that the money is blocked in an escrow account, which would indeed be the practical impact of what Russia says, the answer would, until you discharge the bond, you have not fulfilled the conditions of the bond.”