The risk of a Russian default is “imminent,” Fitch warned last week. Now the three major financial rating agencies classify Russian public debt in category “C”, the last step before D (default). “When rating agencies downgrade an issuer to category C, default is almost inevitable,” recalls Michael Israel, co-founder of IVO Capital Partners. Two reasons are given by the agencies.
“Strengthening sanctions and proposals that could limit energy trade increase the likelihood of a political response from Russia that includes at least a selective non-payment of its sovereign obligations,” Fitch said. “Capital controls by the Central Bank of Russia will restrict cross-border payments including for debt service on sovereign bonds,” adds Moody’s.
Rarely has a country with so little debt (less than 20% of GDP) and which relied so little on foreign investors for financing found itself on the verge of default. In a note, Morgan Stanley fears a “Venezuelan-style default” very soon. “A shame, while the Russian Central Bank had built a veritable financial fortress, with reserves of more than 630 billion dollars.
Enough to largely cover a stock of public external debt estimated at 220 billion dollars (including companies controlled by the government), if the G7 countries had not decided to freeze these assets. Now the Russian Central Bank has access to less than half of its reserves – essentially the less liquid part.
Payment of coupons
Moscow’s last payment default, in 1998, is remembered. It had led to a collapse of the ruble and a shock wave throughout the financial system. Today, the consequences of a default would be very different. Firstly because it would not be the cause but one of the consequences of the crisis. Investors are already fleeing Russian assets and the country is effectively already starved of cash.
The moment of truth is approaching. On March 16, Russia must pay 117 million dollars in coupons on dollar bonds maturing in 2023 and 2043. International investors have little hope of receiving their due. Already, on March 2, a coupon on an OFZ bond issue (in rubles) was only paid to local investors, because the central bank controls capital to limit currency outflows. Payments to non-residents are thus prohibited.
Refund in ruble
In addition, Vladimir Putin signed, at the beginning of March, a decree authorizing the government and companies to reimburse foreign creditors from “hostile countries” in roubles, even when their securities are denominated in other currencies. “This possibility was provided for in the bond loan contracts issued after 2014, specifies Julien Fabre at Candriam, but those which give rise to a coupon payment on March 16 are not part of it. »
A payment in ruble would characterize a default. However, this would not be declared immediately, but after a grace period of thirty days.
“Even if, as announced by Finance Minister Silianov, Russia decides to make a payment in dollars, it will probably not reach investors, because everything is paralyzed, both on the Russian side and on the Western side”, remarks Julien Fabré. For fear of US sanctions Euroclear and Clearstream blocked most transactions.