The odds of Russia defaulting on its external debts are increasing the longer the war in Ukraine lasts, a broad array of organizations and analysts have said.
With the international community applying pressure on Moscow over its invasion of Ukraine, the national economy is poised to contract double digits, prompting the Kremlin to repeatedly employ extraordinary measures to cushion the blows from the economic fallout.
Over the next month, the Russian government has more than $700 million worth of bonds to cover. Despite its $630 billion war chest, the bombardment of sanctions and restrictions that are freezing many of its assets could affect Moscow’s ability to make payments.
The Central Bank of Russia announced on March 1 that it would temporarily ban coupon payments to foreign owners of ruble bonds, also known as OFZs.
“Issuers have the right to make decisions on the payment of dividends and the making of other payments on securities and transfer them to the accounting system,” the institution wrote. “However, the payments themselves will not be made by depositories and registrars to foreign clients. This also applies to OFZ.”
The central bank didn’t clarify how long the ban would stay in effect.
The National Settlement Depository (NSD), Clearstream, and Euroclear would limit payment options on Russian securities for foreign businesses and investors, effectively adhering to the bank’s edict. While the central bank noted that this step is meant to support domestic markets, financial experts say that this is a technical default on upcoming maturity and interest payments.
The first crucial date is March 16, as two bond coupon payments are scheduled. But there are 30-day grace periods installed into these instruments, delaying a formal default to April 15. April 4 is the first principal payment when a $2 billion bond matures.
Russia did successfully pay a ruble-bond coupon on March 2. However, the chief problem for foreign holders, such as BlackRock and The Vanguard Group, is accessing the cash following the prohibition on transfers to foreign investors.
Estimates further suggest that nearly $6 billion worth of credit default swaps (CDS) that bondholders have acquired as insurance mechanisms would require payouts.
“The sanctioning of Russian government entities by the United States, counter-measures within Russia to restrict foreign payments, and disruptions of payment chains present high hurdles for Russia to make a bond payment abroad,” JPMorgan Chase stated in a note to clients. “Sanctions have significantly increased the likelihood of a Russia government hard currency bond default.”
This would force Fitch and Moody’s, the top credit rating agencies, to downgrade Moscow’s investment-grade scores.
“Western governments’ resolve to cut off Russia from the international financial system, combined with a potentially weaker willingness on the part of the Russian government to service its debt on time and in full, raise the probability of more severe credit outcomes for foreign holders of Russian debt securities,” Moody’s Investors Service said in a statement.
In a separate report, the Institute of International Finance (IIF), an association for the global financial services industry, stated that half of the foreign reserves at the central bank are situated in nations that have implemented asset freezes.
Officials noted that Russia would prioritize payments to domestic savers over foreign investors. Elina Ribakova, the IIF’s deputy chief economist, stated that a default on external debt is “extremely likely,” but the small size of foreign holdings would limit the financial damage.
ICE Data Services figures suggest that CDS insuring $10 million of government bonds for five years was quoted at roughly $4 million upfront and $100,000 per year. This signals a 56 percent chance of default.
At the same time, the IIF noted that Moscow possesses a wide range of tools to diminish market volatility. The most notable strategy might be to raise interest rates again, inject banks with more liquidity, and reduce capital flows. Russia might also establish bank holidays to avoid a run on banks during chaotic periods.
This week, the central bank approved a 10.5 percent hike to the benchmark interest rate, lifting it to 20 percent.
“The likelihood that the government and companies are unable or unwilling to make external debt repayments (besides those already affected) has risen significantly,” said William Jackson, chief emerging markets economist at Capital Economics. “While attention is focused on the sovereign, one key point is that, by far, the largest external debts in Russia belong to the corporate sector.”
The 10-year OFZ treasury bond rose to a seven-year high of nearly 13 percent. But the bond market is experiencing thin trading volumes amid suspended activity in the Moscow Exchange. Russia’s $7 billion of bonds due in June 2047 fell below 68 cents.
