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Russia in historic default as Ukraine sanctions cut off payments

Stock Markets Jun 27, 2022 04:37PM ET
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© Reuters. FILE PHOTO: The clock on Spasskaya tower showing the time at noon, is pictured next to Moscow?s Kremlin, and St. Basil?s Cathedral, March 31, 2020. REUTERS/Maxim Shemetov

By Karin Strohecker, Andrea Shalal and Emily Chan

LONDON/NEW YORK (Reuters) -Russia defaulted on its international bonds for the first time in more than a century, the White House and Moody's (NYSE:MCO) credit agency said, as sweeping sanctions have effectively cut the country off from the global financial system, rendering its assets untouchable.

The Kremlin, which has the money to make payments thanks to oil and gas revenues, has rejected the claims, and accused the West of driving it into an artificial default.

Earlier, some bondholders said they had not received overdue interest on Monday following the expiry of a key payment deadline on Sunday.

Moody's credit agency later on Monday said that the missed coupon payment constituted a default.

"Further defaults on coupon payments are likely," Moody's analysts wrote.

Russia has struggled to keep up payments on $40 billion of outstanding bonds since its invasion of Ukraine on Feb. 24.

"This morning's news around the finding of Russia's default, for the first time in more than a century, situates just how strong the actions are that the U.S., along with allies and partners, have taken, as well as how dramatic the impact has been on Russia's economy," the U.S. official said on the sidelines of a G7 summit in Germany, which U.S. President Joe Biden is attending.

Russia's efforts to avoid what is its first major default on international bonds since the Bolshevik revolution more than a century ago hit a roadblock in late May when the U.S. Treasury Department's Office of Foreign Assets Control (OFAC) effectively blocked Moscow from making payments.

A formal default would be largely symbolic given Russia cannot borrow internationally at the moment and doesn't need to thanks to plentiful oil and gas export revenues. But the stigma would probably raise its borrowing costs in future.

“With Russia going into sovereign default the international community has moved into a new, more aggressive phase of its sanctions campaign against Moscow," said Adam M. Smith, partner at Gibson Dunn in Washington.

The payments in question are $100 million in interest on two bonds, one denominated in U.S. dollars and another in euros, that Russia was due to pay on May 27. The payments had a grace period of 30 days, which expired on Sunday.

"Russia’s default – already determined by the failure to pay interest last month – had been largely priced in and bonds have been in the 10-20 cents area for a long time," said Gabriele Foa, portfolio manager of the Global Credit Opportunities Fund at Algebris. "I do not expect creditors to organize and hold talks for a restructuring soon, as these talks are likely not possible amid political tensions."

Russia's finance ministry said it made the payments to its onshore National Settlement Depository (NSD) in euros and dollars, adding it had fulfilled obligations.

In a call with reporters, Kremlin spokesperson Dmitry Peskov said the fact that payments had been blocked by clearing house Euroclear because of Western sanctions on Russia was "not our problem".

Euroclear did not respond to a request for comment.

Some Taiwanese holders of the bonds had not received payments on Monday, sources told Reuters.

With no exact deadline specified in the prospectus, lawyers say Russia might have until the end of the following business day to pay these bondholders.

Credit ratings agencies usually formally downgrade a country's credit rating to reflect default, but this does not apply in the case of Russia as most agencies no longer rate the country.

"I think the market convention will be that it is a default – though the technical issues are rather complex," said Kaan Nazli, portfolio manager at Neuberger Berman, which has a small exposure to Russian sovereign debt but does not hold the bonds that were due a payment on May 27. "It is a somewhat politically driven default."

Emerging markets trade group EMTA recommended on Monday that bonds issued by the Russian government should be traded without accrued interest, the way bonds in default are typically traded.

LEGAL TANGLE

The legal situation surrounding the bonds looks complex.

Russia's bonds have been issued with an unusual variety of terms, and an increasing level of ambiguities for those sold more recently, when Moscow was already facing sanctions over its annexation of Crimea in 2014 and a poisoning incident in Britain in 2018.

Rodrigo Olivares-Caminal, chair in banking and finance law at Queen Mary University in London, said clarity was needed on what constituted a discharge for Russia on its obligation, or the difference between receiving and recovering payments.

"All these issues are subject to interpretation by a court of law," Olivares-Caminal told Reuters.

Russia in historic default as Ukraine sanctions cut off payments
 

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Comments (14)
Ken Roth
Ken Roth Jun 28, 2022 2:25AM ET
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It does not seem as if the Russian care about their own freedom from their dictator and are Happy that they cannot say or do what ever they want otherwise they would have removed Putin from power.This is now a longterm play, where we need to make the western world totally independent on all russian products and commodities and in the end provide 0 euro or dollars to Russia. At the same time we must keep all sanctions alive even strengthen sanctions so not 1 single russia product will be imported into USA, Canada, UK and Europe. Finally we must increase military spending and help Ukraine fight Russia and take back their territory until the win it all back and Russia aggresion gain 0 win. Also offcourse use all russian seized assets to pay for war damages.
Ken Roth
Ken Roth Jun 27, 2022 8:33AM ET
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Dear Russians why dont you just shoot the guy and end this war immediately or you all chickens
Brad Albright
Brad Albright Jun 27, 2022 8:33AM ET
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Has NATO ever taken a military action with which you disagree?
Ken Roth
Ken Roth Jun 27, 2022 8:33AM ET
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Brad Albright
Brad Albright Jun 27, 2022 8:33AM ET
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That was in reply to another commenter who got deleted... But, thanks.
Nenad Lutovac
Nenad Lutovac Jun 27, 2022 8:04AM ET
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Does that mean that if I go to market, want to pay, seller decline my USD, tell me I am thief and call police?
First Last
First Last Jun 27, 2022 8:04AM ET
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"seller decline my USD" -- Except you're not trying to pay in USD as agreed.
Brad Albright
Brad Albright Jun 27, 2022 8:04AM ET
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No, it means your credit card has been cut off and the police are called to report you as a mur der er.
jason xx
jason xx Jun 27, 2022 6:28AM ET
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Russia is nothing but a glorified gas station.
Nityanand Poojary
Nityanand Poojary Jun 27, 2022 5:11AM ET
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Russia will emerge stronger. Its western countries which will be badly impacted by high inflation on account of high feul prices and winter fast approaching.
jason xx
jason xx Jun 27, 2022 5:11AM ET
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Russia will be crushed first economically then militarily. Within 5 years no one will buy anything from them.
First Last
First Last Jun 27, 2022 5:11AM ET
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Russian elite's position in Russia is stronger.
Benoit Avril
Benoit Avril Jun 27, 2022 5:02AM ET
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Artificial default and real invasion. I think the west should have done the opposite. Engaging Russian troops in Ukraine while keeping economic ties unchanged. The real fear is the nuclear threat.
jason xx
jason xx Jun 27, 2022 5:02AM ET
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I agree and the nuclear threat is far worse for Russia nato has way more nukes
Maximus Maximus
Maximus Maximus Jun 27, 2022 4:36AM ET
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russia, the next north korea
First Last
First Last Jun 27, 2022 4:36AM ET
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John Doe   Sure, the N. Korean elite is fine and fat
Nityanand Poojary
Nityanand Poojary Jun 27, 2022 4:01AM ET
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Whats happenming in western countries is a clear indication of their downfall. Those countries which belittle the sacrifices of their ancestors are cursed as they are deprived of blessing from ancestors by their own act.
Benoit Avril
Benoit Avril Jun 27, 2022 4:01AM ET
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There is no downfall of the west, there is the rise of other countries who adopt the industry, the technology, the education and the economy developed mostly in the west (which is less and less true, because knowledge spreads). The west is not falling, you are becoming the west.
Nityanand Poojary
Nityanand Poojary Jun 27, 2022 4:01AM ET
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I do understand that west is following east and east is following west. I find something interesting here east is trying to get out of the situation but surprisingly west is trying to get into that stituation which east is currently in.
Brad Albright
Brad Albright Jun 27, 2022 4:01AM ET
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Interesting perspective, but you have your facts wrong. Our ancestors sacrificed their lives in WWI and WWII to protect innocents against slaughter and to international order. The west now honors them by continuing to stand for those same values.
Benjamin USA
Benjamin USA Jun 27, 2022 4:01AM ET
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You can tell brainwashed or bot when they say “tHe WeSt” usually followed by a bunch of tears and crying since the comment had to get approved for publish by the censor
Nils Hullmann
Nils Hullmann Jun 27, 2022 3:30AM ET
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this is hilarious I don't take your money so I declare you insolvent...it's like bidens putinflation which was 7.5 before war even started
Nils Hullmann
Nils Hullmann Jun 27, 2022 3:28AM ET
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easy to test...Russia next week insolvent.....or Reuters full of sh9t
Thomas Phantom
Thomas Phantom Jun 27, 2022 3:28AM ET
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youre the only thing full of sh it
John Laurens
John Laurens Jun 27, 2022 3:28AM ET
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Thomas Phantom  you’re seriously defending POS Reuters?  OFLMFAO
First Last
First Last Jun 27, 2022 3:28AM ET
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This article doesn't mention "insolvent".
 
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