Russia approached bankruptcy on Sunday amid few signs that investors holding its international bonds have received a payment that portends what will be the country’s first bankruptcy in decades.
Russia has struggled to keep payments of $ 40 billion in outstanding bonds since its invasion of Ukraine on February 24th, sparking widespread sanctions that virtually cut the country out of the global financial system and made its assets inaccessible to many investors.
The Kremlin has repeatedly said there are no grounds for Russia’s bankruptcy, but is unable to send money to bondholders due to sanctions, accusing the West of trying to bring it into artificial bankruptcy.
The country’s efforts to divert what would have been its first major default on international bonds since the Bolshevik revolution more than a century ago hit an insurmountable hurdle when the US Treasury Department’s Office of Foreign Assets Control (OFAC) effectively blocked Moscow from making payments at the end of May.
“Since March, we thought that Russian bankruptcy was probably inevitable, and the question was exactly when,” Denis Hranitsky, head of sovereign litigation at law firm Quinn Emanuel, told Reuters. “OFAC intervened to answer this question for us, and now it is with us.
While the formal default would be largely symbolic, given that Russia cannot borrow internationally at the moment and does not need it due to its rich oil and gas revenues, the stigma is likely to 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, Russia was due to pay on May 27. Payments had a grace period of 30 days, which expires on Sunday.
Russia’s finance ministry said it had made payments to its national settlement depository (NSD) in euros and dollars, adding that it had fulfilled its obligations.
However, the funds are unlikely to find their way to many international holders. For many bondholders, failure to receive the money due on time in their accounts is a default.
As the prospectus does not specify an exact deadline, lawyers say Russia may have until the end of the next business day to pay bondholders.
The legal situation around bonds seems complicated.
Russian bonds were issued with an unusual variety of terms and a growing level of uncertainty about those sold recently, when Moscow was already facing sanctions over the annexation of Crimea in 2014 and the poisoning incident in Britain in 2018.
Rodrigo Olivares-Caminal, chairman of banking and finance at Queen Mary University in London, said it needed clarity on what constituted a discharge for Russia from its obligation or the difference between receiving and recovering payments.
“All these issues are subject to interpretation by a court, but Russia has not waived its sovereign immunity and has not submitted to the jurisdiction of any court in either prospect,” Olivares-Kaminal told Reuters.
In a sense, Russia is already in default.
The Derivatives Commission has ruled that a “credit event” has occurred on some of its securities, which has led to the repayment of some of Russia’s credit default swaps, instruments used by investors to insure debt exposure against default. This was caused by Russia’s failure to pay $ 1.9 million in accrued interest on a payment due in early April.
Until the invasion of Ukraine, sovereign default seemed unthinkable, with Russia being rated as an investment rating shortly before. The default would also be unusual, as Moscow has the means to service its debt.
OFAC issued a temporary exemption, known as General License 9A, in early March to allow Moscow to continue paying investors. He allowed it to expire on May 25 as Washington tightened sanctions against Russia, effectively cutting off payments to US investors and legal entities.
The expired OFAC license is not the only obstacle facing Russia, as the European Union imposed sanctions on NSD, Russia’s appointed Eurobond agent, in early June.
Moscow has been struggling in recent days to find ways to deal with upcoming payments and avoid defaults.
Last Wednesday, President Vladimir Putin signed a decree launching interim procedures and giving the government 10 days to select banks to process payments under a new scheme, suggesting that Russia will consider its obligations fulfilled when it pays bondholders in rubles.
“The fact that Russia says it is complying with its bond obligations is not the whole story,” Zia Ula, a partner and head of corporate crimes and investigations at Eversheds Sutherland, told Reuters.
“If you as an investor are not satisfied, for example, if you know that the money is stuck in an escrow account, which in practice would be the practical impact of what Russia says, the answer will be until you fulfill the obligation, you have not fulfilled the conditions of the bond. “
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