The likelihood of a default by Russia has been increasing significantly since payment on a large sovereign bond came due last week. Finding itself with $649million (£495million) it is unable to return to investors in dollars due to sanctions, Russia instead opted to attempt to make the payment in rubles. In response credit ratings agency S&P has now downgraded Russia and declared a “selective default”, meaning it believes Russia will fail to pay in this particular instance but may meet other obligations. The agency said: “We currently don’t expect that investors will be able to convert those ruble payments into dollars equivalent to the originally due amounts, or that the government will convert those payments within a 30-day grace period.”
Under the terms of the bond payment must be made in the currency it was issued in, in this case the US dollar.
Russia will become formally in default if payment cannot be received by investors within 30 days of the 4 April.
While Russia in principle has extensive reserves of foreign currencies such as the dollar, sanctions have largely blocked it from accessing them or allowing banks to process them.
S&P warned further restrictions risked “hampering Russia’s willingness and technical abilities to honour the terms and conditions of its obligations to foreign debtholders”.
The situation has provoked fury in the Kremlin with Russia’s Finance Minister Anton Siluanov accusing the West of trying to force Russia into what he calls an “artificial default”.
Mr Siluanov has now threatened to take legal action, saying that Russia would sue and insisting it has “taken all the necessary steps to ensure that investors receive their payments”.
Speaking to pro-Kremlin newspaper Ivzestia he explained: “We will present in court our bills confirming our efforts to pay both in foreign currency and in roubles.
“It will not be an easy process.
“We will have to very actively prove our case, despite all the difficulties.”
Meanwhile though Russia’s debt crisis is beginning to spread beyond sovereign debt to its corporate sector.
The EMEA Credit Derivatives Determinations Committee (CDDC) ruled this week that state-owned rail firm Russian Railways is also in default after missing both a payment deadline and a 10 day grace period.
The CDDC, whose members include major banks such as Goldman Sachs and JPMorgan, ruled that a failure to pay had occurred, potentially setting a precedent for future situations where sanctions prevent Russia making payment.
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One source, speaking on condition of anonymity told Reuters: “Apparently CDDC says yes… and probably means it will conclude something similar with the Russian sovereign trying to pay a USD coupon – but failing to.”
Further defaults and a falling credit rating will make it increasingly hard for Russia to take on future debt with even those potentially willing to lend such as China likely to charge expensive terms.
Russia has already revealed this week it will halt the sale of sovereign bonds this year, with Mr Siluanov admitting the interest rates would be “cosmic”.
The cost of insuring Russian debt has already soared, representing a 99 percent chance of default within the first year.