Missed interest payment puts Russia on brink of foreign debt default

RUSSIA has missed a $1.9m (£1.5m) interest payment on a sovereign bond in a failure that starts the clock ticking on a sovereign debt default.

The Kremlin failed to pay interest when it made a late coupon payment last month on a bond that had matured on April 4.

Overseas investors appealed to the Credit Derivatives Determinations Committee, an international arbitrator, which has ruled it is a “failure to pay credit event”, meaning lenders can collect an insurance payout known as a credit default swap.

It effectively starts Russia on a path to the country’s first default on foreign debt in a century, putting Moscow at risk of being locked out of international markets.

The credit committee, whose members include Citibank, Bank of America, Deutsche Bank, Elliott Management and Pimco, will meet again next week to continue the process, potentially leading to an auction to determine the size of any payout.

Damian Sassower, a strategist at Bloomberg, said this ruling could trigger a payout on as much as $3.2bn worth of swaps.

He told Bloomberg television: “It’s going to be very difficult for Russia to overcome this.

“The market has long priced a default … The market really thought that something like this was happening.

“They [Russia] were going to be placed in technical default, either because the US government is forcing them in that direction, which is obviously what everyone is saying, or they just don’t want to pay any more.”

One company that may take a hit from yesterday’s ruling is Pimco, the US investment manager.

Its largest fund increased its exposure to Russian default swaps in the run-up to the war by selling more than $100m of protection to banks including Barclays and JP Morgan.

After the invasion, investors piled into Russia’s credit default swaps, while also buying the beaten-down government or corporate debt the swaps are tied to.

A Russian default on other debt looks inevitable, according to some investors, after the US Treasury ended a licence that had allowed creditors to receive payments from Russia despite financial sanctions. Russia has about $40bn of international bonds outstanding and just under $2bn in payments is due this year.

Sanctions imposed on the country following its invasion of Ukraine, as well as countermeasures by Moscow, have excluded Russia from the global financial system and pushed it to the brink of default.

About half of its $640bn reserves abroad have been frozen.

The Kremlin averted a default last week by paying coupons in foreign currency. However, there are another three bond payments coming up later this month.

An international default would be the first for Russia since the aftermath of the Bolshevik revolution. It defaulted on about $40bn of domestic debts in 1998 due to a lack of “sufficient funds”.

Finance minister Anton Siluanov said last month that Moscow will service its external debt obligations in roubles if the US blocks other options.

Not all bonds allow for payment in roubles. The country has said it could extend a scheme used for its gas payments to sovereign bondholders, allowing Eurobond investors to open Russian foreign exchange and rouble accounts.

The money would be channelled through Russia’s National Settlement Depository, which is not under Western sanctions.