Russia is still sliding towards default. the US Treasury will decide.
- The Russian government could still default on its foreign bonds within weeks, despite major payments made last week.
- Indeed, a key US Treasury rule, which authorized the payments, is due to expire later in May.
- If the Treasury does not extend the exemption, Russia will have a very hard time getting its payments to bondholders.
Like Indiana Jones screaming under a closing door The cursed templeRussia managed to avoid default at the very last moment on Tuesday as bond payments began to end up in investors’ accounts.
Yet there is still a big hurdle in Russia’s way that means it could easily fall into default when its next bond payments fall due on May 27.
The United States could cut off Russia
Until now, Western bondholders were only allowed to receive sovereign bond payments from Russia because of a special rule put in place by the US Treasury in late February.
The exemption – officially called 9A General License — “entitles U.S. persons to receive interest, dividends, or payments at maturity on debt or equity” from the Russian government. He has allowed money to flow out of Russia, despite the ever-deepening layer of sanctions suffocating the country’s financial system.
The problem for Moscow is that the exemption expires on May 25.
That’s two days before it is due to send investors $71 million in coupon payments on a dollar bond and 36 million euros ($38 million) on a euro bond.
Bondholders and analysts are wondering if the US Treasury will extend the exclusion. A Treasury spokesman declined to comment.
“They may or may not extend the general license,” Timothy Ash, emerging markets strategist at BlueBay Asset Management, told Insider. “If they grant an extension, it will be temporary. It could be a month, could be three months. We will wait and see.”
Moscow has to shell out dollars
Russia is allowed to pay in rubles on the euro-denominated bond, thanks to a fallback provision in the contract. But he has to cough up the $71 million in dollars.
If investors don’t get their money, Russia will have defaulted in the eyes of Western financial institutions. Until the country sent the dollar payments last week, a global banking committee was on the verge of declaring that Moscow had officially forgiven its debts.
Andy Sparks, an analyst at financial data firm MSCI, said in a note this week that market prices suggest investors still think Russia is very likely to default.
He said prices for credit default swaps – financial contracts that insure investors against default – suggest there is a 67% chance of default within one year and an 88% chance of default five years from now. .
“A high level of uncertainty continues to hang over the Russian sovereign bond market,” Sparks said.
Russia says default would be ‘artificial’
Russia has argued that Western sanctions are pushing for “artificial” default, even if it has the money to pay. The government continues to receive significant revenue from energy exports and it has access to hundreds of billions of dollars in foreign exchange reserves, despite sanctions freezing much of the stock.
Yet such an argument is “ridiculous”, according to Ash. “Geopolitics is a key part of the country’s credit history. You can’t ignore it.”
Including the $109 million due on May 27, Russia still has to make nearly $2 billion in bond payments this year.
It had about $39 billion of foreign-denominated bonds outstanding in January, according to JPMorgan analysts, of which $20 billion belonged to foreign investors.
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