Russia falls into default zone when payment period expires According to Reuters

© Reuters. FILE PHOTO: The clock on the Spasskaya tower shows the time at noon, pictured next to the Kremlin in Moscow and St. Basil, March 31, 2020. REUTERS / Maxim Shemetov

By Karin Strohecker

LONDON (Reuters) – Russia looked set to default on its first government debt in decades as several bondholders said they had received no overdue interest on Monday after the main payment due a day earlier .

Russia has struggled to maintain payments on $40 billion in outstanding bonds since invading Ukraine on February 24, as sweeping sanctions have cut the country off from the financial system. globally and make many investors unable to touch their assets.

The Kremlin has repeatedly said there are no grounds for Russia to default but it cannot send money to bondholders because of sanctions, accusing the West of trying to push the country into an artificial default.

Russia’s efforts to avoid what would be the first major default on international bonds since the Bolshevik revolution more than a century ago hit an insurmountable hurdle in late May when the Comptroller’s Office. The US Treasury Department’s Foreign Assets Control (OFAC) blocks Moscow from making payments.

“Since March, we think Russia’s default is probably inevitable, and the question is when,” said Dennis Hranitzky, head of sovereignty litigation at the law firm Quinn Emanuel. with Reuters. “OFAC stepped in to answer that question for us, and the default is now on us.”

Although a formal default is largely symbolic given that Russia currently cannot borrow internationally and does not need its rich oil and gas export revenues, the stigma is likely to increase costs. the country’s borrowing costs in the future.

The payments in question are $100 million in interest on two bonds, one in US dollars and one in euros, Russia due May 27. The payments have a grace period of 30 days, expires on Sunday.

Russia’s Finance Ministry said it had made payments to the country’s National Settlement Depository (NSD) in euros and dollars, adding that it had fulfilled its obligations.

Some Taiwanese bondholders did not receive payment on Monday, sources told Reuters.

For many bondholders, failure to receive the amount owed on time to their account is considered a default.

With no exact deadline specified in the prospectus, the lawyers say Russia may have until the end of the next business day to pay bondholders.


The legal situation surrounding the bonds seems complicated.

Russian bonds have been issued with an unusual variety of maturities and an increasing degree of ambiguity over those sold recently, as Moscow is facing sanctions over its annexation of Crimea in 2014. 2014 and one poisoning in the UK in 2018.

Rodrigo Olivares-Caminal, chair of banking and financial law at Queen Mary University of London, said there should be clarity about what constitutes Russia’s discharge under its obligations, or the difference between receipt and collection of payments.

“All these issues are subject to the interpretation of the court of law, but Russia has not waived any of its sovereign immunity nor has it submitted to it,” Olivares-Caminal told Reuters. jurisdiction of any court in any prospectus”.

In some ways, Russia has defaulted.

A derivatives committee ruled that a “credit event” occurred on some of its securities, which triggered a settlement for several credit default swaps. used in Russia – a tool used by investors to secure debt in the event of a default. This was triggered by Russia’s failure to pay $1.9 million in accrued interest on a payment due in early April.

Until the invasion of Ukraine, a sovereign default seemed unthinkable, with Russia having an investment rating right before that. A default would also be unusual since Moscow has enough money to pay it off.

OFAC issued a temporary waiver, known as the 9A general license, in early March to allow Moscow to continue paying investors. It allows it to expire on May 25 as Washington tightens sanctions on Russia, cutting payments to American investors and entities.

The expired OFAC license is not the only obstacle facing Russia when in early June the European Union imposed sanctions on NSD, Russia’s designated agent for Eurobonds of surname.

In recent days, Moscow has been trying to figure out how to settle upcoming payments and avoid default.

President Vladimir Putin signed a decree last Wednesday to launch interim procedures and give the government 10 days to select banks to process payments under a new scheme, showing Russia will consider fulfilled debt obligations when they pay bondholders in rubles.

“Russia saying it is complying with its obligations under the terms of the bond is not the whole story,” said Zia Ullah, partner and head of corporate crime and investigations at law firm Eversheds Sutherland told Reuters.

“For example, if you are an unhappy investor, if you know money is stuck in a margin account, that would be the actual impact of what Russia is saying, the answer would be, give until you fulfill the obligation, you have not satisfied the conditions of the bond.”

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