Default or not for Russia? The subject came back on the table this Monday, June 27. Because, as a reminder, Moscow had to pay 100 million dollars of interest on its debt on May 27, a deadline accompanied by a grace period of one month which therefore expired on Sunday. If the Russian Ministry of Finance claimed to have paid the money in foreign currency from May 20, it admitted on Monday that the money had not reached the creditors.
The reason: banking intermediaries blocked payments because of the sanctions imposed by Western countries as a result of the war in Ukraine. But Moscow considers that the “non-obtainability of money by investors is not the result of non-payment but is caused by the action of third parties, which is not directly considered (…) as a case default”.
An opinion that does not share the rating agency Moody’s. “On June 27, holders of Russian debt had not received a coupon payment on two Eurobonds…which we consider an event of default by our definition,” explained the rating agency in a press release published on its site on the night of Monday to Tuesday.
Decision expected on Wednesday
This Moody’s estimate does not, however, introduce a legal status of payment default for Russia since the rating agencies (Fitch, Moody’s, S&P Global Ratings) no longer have the right to rate the country since the international sanctions against it. , due to the invasion of Ukraine. “They are now prohibited from rating Russian sovereign bonds. We could well have a defect in fact, without official proclamation by an authorized body”, explains Eric Dor, director of economic studies at the IESEG business school.
It is now up to a committee of creditors, the Credit Derivatives Determinations Committee (CDDC), to assess whether or not Russia misses payments. This committee had thus recorded in early June the non-payment by Moscow of 1.9 million dollars in late payment interest on a previous deadline. It plans to meet on Wednesday June 29 at the beginning of the afternoon to deliberate on the missed deadline of May 27. It is also he who will decide whether to activate CDS (Credit Default Swap), financial products that serve as insurance against payment defaults on a debt.
For many bondholders, failure to receive a coupon payment on time constitutes a payment default. With no exact deadline specified in the prospectus, lawyers say Russia may have an extra business day to pay bondholders, however.
Russia’s last payment default on its foreign debt dates back in any case to 1918 and Lenin’s decision not to pay the debts of the tsarist regime.
The risk of an economic crisis
In the event of a declared defect, “Russia will no longer be able to borrow in international currencies”, warns Slim Souissi, teacher-researcher at the IAE of the University of Caen and former financial analyst at Fitch. However, this would be mainly symbolic since Russia cannot borrow abroad at the moment anyway and does not need to. But it would risk increasing its borrowing costs in the future. “In the short term, it will have difficulty raising funds on the international markets” and it could last ” years “, supports the expert.
Failure to pay can indeed have serious consequences. In Argentina, the moratorium decreed in 2001 on the payment of the international debt of around 100 billion dollars had plunged the country into a deep economic, political and social crisis. And the Mexican default of 1982 was followed by a debt crisis in other developing countries.
The situation in Russia, however, is a little different. “There are payments for around two billion dollars by the end of the year, but that’s not what will destabilize” the global financial system, according to Eric Dor.
On the other hand, the situation could turn into a legal headache. Russian obligations are particularly vague concerning the jurisdiction able to settle disputes between lender and borrower, according to legal experts interviewed by AFP.
Moscow offers to pay in rubles
Moscow ensures that it makes available, in rubles, the sums it owes to its creditors with the National Settlement Depository (NSD), a Russian financial entity. Because, since May 25, Washington has decided to prohibit it from paying its foreign debt in Western currencies. But if “reimbursement in rubles is not provided for in the contract of these bonds, it is considered a default of payment”, However, warns Slim Souissi.
Russia suddenly argues that the system allows Western holders of Russian debt to recover their money, by requesting the conversion into the currency of their choice of the sums deposited in rubles with the NSD. But getting the funds out of Russia remains tricky and “Investors have been reluctant to open NSD accounts anyway,” notes Eric Dor.