Russian bonds: risk of defaults is high amid tit-for-tat sanctions battle
Russia is well on its way to complete isolation from the US, EU and countries allied with them. One of the few areas where this might save Russia money — in the short-term, at least — is sovereign bond coupons. On Sunday, the finance ministry said it might not be able to make these payments as a result of sanctions imposed by both sides.
A technical default on Russian sovereign dollar debt could begin when a coupon on dollar bonds falls due next week. That would deepen the pain for foreign investors that have helped finance the government of Vladimir Putin.
Russian government debt remains low by international standards. But there are still $39bn of dollar-denominated bonds outstanding. If payments worth $107mn due on the 16th of March are missed, Russia then has a 30-day grace period in which to pay.
Bonds issued after 2018 have fallback clauses that allow payment in roubles. But creditors may not be able to accept these. The world’s big banks and clearing houses are closing their doors to Russian business.
Government dollar bonds due to be repaid in April are now trading at 20 cents on the dollar. One-year credit default swap prices currently suggest a 70 per cent probability of default.
The payout for CDS holders is unclear. If a default occurs, bonds would typically be auctioned to establish fair value. But prices would reflect sanctions as much as Russian creditworthiness — or the lack of it.
Russian businesses may be better placed to pay some foreign creditors, depending on the nature of sanctions against them. They may be able to make dollar repayments from funds held abroad. Rosneft and Gazprom have about $3.3bn of Eurobond principal payments due in the next few days. Unconfirmed reports suggest the gas giant could make payments via a Luxembourg-based special purpose vehicle.
No foreign investor should count on such payments if they are based in a country engaged in the economic war against Russia. The prudent course, given the uncertainties, is to assume they will have to be written off.
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