January 29, 2023

Donalds Hobby

World Finance Reviews

Russia default fears ease as key debt payments reach investors

Fears of a bond default by Russia eased after US$117 million of interest payments due this week started to reach international investors, promising to temporarily avert a lapse that would have injected even more uncertainty into world credit markets. 

Money managers based in the U.K., Germany and the U.S. said on Friday they had received coupon payments on two Russian Eurobonds that were originally due on Wednesday. 

The news was greeted with relief from investors, since it showed that Russia was still able — and willing — to cover its foreign debts despite the sweeping sanctions that have severed the country from much of the world financial system. 

But it was only the first in a series of tests of Russia’s ability to service its debts abroad, with credit-rating companies still seeing significant risk of a default as the Ukraine war grinds on and sanctions take a major economic toll. Russia has at least US$488 million of interest payments coming due over the next 10 weeks, as well as a US$2 billion bond it must repay next month, data compiled by Bloomberg show.

“We have numerous more coupon payments and redemptions coming due in the rest of the year and over the next 12 to 18 months,” Cristian Maggio, head of portfolio strategy at Toronto Dominion Bank in London, said in an interview with Bloomberg Television earlier on Friday. “The market will be holding its breath for quite some time.”

The failure to make timely payments — or making them in a currency different from what was stipulated in the debt contracts — could still trigger a wave of defaults among the roughly US$150 billion in foreign-currency debt owed by the government and Russian companies. Some investors have warned that a Russian default could ultimately lead to a global sovereign debt crisis if investors start shunning risk and more countries are locked out of financial markets.

S&P Global Ratings on Thursday said it could deem Russia in default if the payments it makes are not accessible to foreign investors or aren’t in the required currency. Moreover, a carve-out in U.S. sanctions that allowed financial intermediaries to process the bond payments is set to expire in May, posing new legal obstacles.

Once the “carve out expires in May, creditors are likely to assign a much higher probability of default,” said Anthony Kettle, emerging markets portfolio manager at BlueBay Asset Management.

The money managers who said they received the payments were notified of the credit on their accounts on Friday. They declined to be identified because they aren’t authorized to speak publicly.

Russian Finance Minister Anton Siluanov reiterated this week that the nation would resort to settling the payment in rubles if a dollar transfer failed. If Russia had paid in its local currency, credit graders including Fitch Ratings said bondholders would have had the right to call a default after a 30-day grace period was up. 

The wider market interest in every step of the payment process for the coupons exemplifies just how complicated Russia’s relationship has become with global investors. 

In the weeks since it invaded Ukraine, the energy-rich nation has become the world’s most sanctioned and seen its credit rating slashed to the lowest levels of junk. It’s the only nation in the world with a C rating at Fitch, one notch above default, according to data compiled by Bloomberg, and it has been downgraded to similarly low levels by other rating companies. 

“I can’t remember a time when there has been more uncertainty over a sovereign — the Argentina default back in 2001 was messy but predictable,” said Gary Kirk, a portfolio manager at TwentyFour Asset Management. “This is far more difficult due to the global sanctions.”