Russia default risk surges as US set to end key bond waiver

Russia has managed to meet all its sovereign debt obligations up to now, weaving through the tangle of sanctions imposed after it invaded Ukraine.
Image: Anton Siluanov, Bloomberg

Russian default risk surged as investors reacted to the possibility that the Biden administration will fully block bond payments from the country to US investors from next week.

The move may be the final straw in Russia’s debt saga, pushing the country into its first foreign default in a century. Despite sweeping sanctions, it’s so far managed to avoid that, thanks in part to a US waiver that allowed bond payments to US investors.

But on Wednesday, Treasury Secretary Janet Yellen confirmed that it’s unlikely that the exemption will be extended once it expires on May 25.

“The expectation was that it was time-limited,” she said in Bonn, Germany.

Insurance on Russian sovereign debt — used to protect investors against non-payment — jumped on Wednesday, signalling a 90% chance of a default within one year. That probability rose from 77% on Tuesday, according to ICE Data Services.

Russia has managed to meet all its sovereign debt obligations up to now, weaving through the tangle of sanctions imposed after it invaded Ukraine. That includes an 11th-hour escape earlier this month, when blocked payments were eventually allowed through after Moscow tapped its domestic dollar reserves. Russian corporations haven’t been so fortunate, with billions of dollars of debt now in technical default.

Finance Minister Anton Siluanov reiterated on Wednesday that Russia has no intention of defaulting on the almost $20 billion of sovereign debt it owes to foreign investors, and will pay in rubles if transfers are blocked, according to the Tass news service.

In April, Siluanov pledged to sue if Russia is forced to break its obligations.

Moscow’s next debt transfers are due May 27, on foreign bonds maturing in 2026 and 2036. Those payments are at risk if US investors are forbidden from receiving Russian funds, though there is a 30-day grace period for Russia to find a solution, as it did earlier this month.

Both bonds have clauses allowing payment in other currencies, but it’s far from clear that this will help Russia get over the latest US hurdles.

The 2026 is dollar-denominated but allows for payment in euros, Swiss francs or sterling, as well as for interest payments in dollars to accounts in Switzerland, the UK or the EU.

The euro-denominated 2036 bond has an additional clause allowing payment in roubles.

However, Russia must give creditors notice if it opts to use the alternative currencies. While that’s five days for the 2026 bond, it’s 15 days for the 2036, suggesting it may already have missed the window.

The 2026 note was down by 33% on Wednesday at 16 cents on the dollar, according to CBBT data compiled by Bloomberg. It’s at its lowest level since mid-March, when Russia succeeded in making the first external debt payment since the invasion of Ukraine thanks to the OFAC carveout. The bond maturing in 2036 was little changed.

© 2022 Bloomberg

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