The US Treasury took action against Russia, not allowing US financial institutions to process Russian government debt payments. While Russia has so far remained willing to pay interest and principal, sanctions that restrict US banks from processing bond payments raise the possibility of Russia failing to meet its obligations. Up until that point, Russia tried to make dollar-denominated coupon payments just this week; however, US banks were prevented from processing transfers to bondholders.

 

The Russian government made interest payments in rubles instead of US dollars. Since the beginning of the conflict and prior to the sanctions imposed by the US Treasury, credit rating agencies had warned that paying off dollar-denominated debt in rubles would be considered a default. If rating agencies and regulators determine that a "credit event" has occurred under Russia's government bond contracts, the government will enter a 30-day grace period during which debt can still be paid in US dollars and Russia will not fall into technical default.

 

If Russia enters the 30-day grace period and fails to meet its dollar-denominated obligations, Russia's default will occur. In the coming months, Russia will have to pay bondholders in more than one in dollar terms. The same logistical and operational difficulties may cause Russia to repay dollar-denominated debts in rubles, although the payments are not particularly large. Additional bonds entering the grace period are also at risk of default. Russia will have to make $70 million in interest payments in May and close to $400 million in coupon payments in June. September's obligations are more burdensome, as the government will have to pay a total of $800 million. The list below includes Russian state eurobonds and coupon/principal payments.

 

Russian government Eurobonds and bond coupon payments… Source: Bloomberg

 

While all this was going on, the first default statement was also made. The ISDA organization, which had the first say in whether Russia would default if it did not pay or pay in rubles, decided that Russsian Railways was in default. EMEA DC concluded that the Reference Entity was required to pay interest to the LPN Issuer under the Facility Agreement on March 10, 2022 and that interest was not paid, and on March 28, 2022, a Loan Payment Failure Event occurred with respect to the Reference Entity on the loan under the Facility Agreement. .

 

There is a serious recovery in the ruble, which is almost unaffected by the embargoes, after the volatility in the post-war period. However, the recovery of the ruble, which cannot be considered as a convertible currency in this environment, is a product of the counter-sanctions and policies implemented to support the currency. These policies include strict capital controls, forcing Russian companies to sell foreign currency (80% requirement to convert foreign exchange revenues into rubles), forcing "enemy" countries to buy Russian energy in rubles, aggressive monetary tightening, and Russia's purchase of up to $10 billion in ruble-denominated assets. state wealth funds. Nor will capital controls or other counter-sanctions be lifted if Russia is declared to be in default on government securities.

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