New Episode in the Russian Debt Saga – Putin’s Russia’s Default Seems Closer Than Ever.
But beware, Russia has not yet said its last word.
Could this finally be the last episode in the Russian debt saga?
In the middle of last week, the U.S. Treasury chose not to renew the waiver that allowed Vladimir Putin's government to continue to pay its American creditors in dollars, despite the sanctions, pushing Russia a little further towards default.
Since the middle of last week, American banks and individuals holding Russian bonds are no longer allowed to accept payments from Moscow. Here is what the U.S. Treasury Department said on the evening of Tuesday, May 24, 2022:
“The Office of Foreign Assets Control (OFAC) will not renew the provisions of the waiver that expire on May 25, 2022, at 12:01 a.m. EDT.”
Russia says it will pay its debts in rubles if necessary
The very next day, the Kremlin reacted by declaring that Moscow would continue to honor its debts ... but in rubles. Here is the statement issued in reaction to this American decision by the Minister of Finance, Anton Siluanov:
“Russia is facing an artificial situation created by an unfriendly nation. We have the money and the will to pay.”
Russia, which was due to pay $100 million on Friday, May 27, 2022, had already transferred part of the funds in mid-May 2022. The payment in rubles would a priori violate the terms of payment of one of the bonds whose coupons are due on May 27. At this stage, the procedure that Moscow intends to put in place for these payments remains unclear and it is not certain that investors will eventually get their money back.
At the beginning of the war in Ukraine, Washington had granted this temporary waiver to "allow for an orderly transition and time for investors to sell their securities", as explained in mid-May 2022 by US Treasury Secretary Janet Yellen. She had already stated that the waiver would "probably" end on schedule.
Not all payments to Americans are prohibited after May 25, 2022. According to an authorization issued by the Treasury on April 7, 2022, American investors have until June 30, 2022, to get rid of their Alfa-Bank bonds and until July 1, 2022, for Alrosa debt securities.
This decision shows that Washington prefers to intensify its financial war against Moscow rather than let Russia draw on its foreign exchange reserves for the benefit of American investors. Already in early April 2022, the Treasury prohibited U.S. banks from making dollar payments on Russian debt from Moscow's accounts held with them.
Russia was forced to make payments in rubles and was immediately placed in selective default by the S&P rating agency.
The Russian debt saga could last several more months
In case of default, Russia has a grace period of up to thirty days to find a solution, as it did in early May when it paid out money to investors at the last minute.
This new change of rules in Washington is certainly a new pebble in Moscow's shoe, but Russia, rich in its hydrocarbon trade, could still escape default.
Indeed, bondholders outside the United States can still receive funds. And since most of them are in Europe, there would not be enough creditors left to declare a default, ITI Capital, one of Moscow's largest brokers, told Bloomberg. The threshold for reporting a default is usually set at 25 percent of outstanding bonds.
The Russian debt saga is therefore far from over. To be continued.
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