Russia Bond Default Coming Up And What It Means

Russia is going to default on bonds but some of the defaults may not trigger CDS obligations that pay out in case of default.

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Russia Warns Sovereign Bond Holders    

Russia has the means and ability to make bond payments. However, it can't make those payments because of restrictions placed on its foreign reserves by the Fed, ECB, and other central banks.

Reuters reports Russia warns sovereign bond holders that payments depend on sanctions. 

Russia said on Sunday that sovereign bond payments will depend on sanctions imposed by the West over the invasion of Ukraine, raising the spectre of its first major default on foreign bonds since the years following the 1917 Bolshevik revolution.

That raises the possibility of a technical default on debt by Russia after much of its $640 billion in reserves were frozen by the West after President Vladimir Putin ordered what Russia describes as a special military operation in Ukraine on Feb. 24.

While Russia has only $40 billion in international bonds outstanding across 15 dollar or euro-denominated issues, its corporates have built up vastly more foreign debt.

Ruble Work Around

Fortune reports Putin’s Ruble Work-Around Still Leaves Bond Payments in Doubt.

Russia and Russian companies will be allowed to pay foreign creditors in rubles, according to a decree signed by President Vladimir Putin on Saturday, as a way to service debt while capital controls remain in place. 

According to Saturday’s decree on servicing foreign-held debt, payments will be considered executed if they are carried out in rubles at the central bank’s official rate. 

Some of Russia’s foreign sovereign bonds do allow payments in rubles. That’s a potential problem for holders of credit-default swaps, which are derivatives that insure against defaults. JPMorgan Chase & Co. strategists led by Trang Nguyen say that the optionality to pay in rubles “may render these bonds out of scope for CDS as ‘obligations’ and ‘deliverable obligations,’” because the ruble is the domestic currency of the issuer, and it just so happens to not be a hard currency, such as the dollar or euro.

“This means that bonds with ruble fallback provisions can neither trigger CDS nor be delivered into CDS,” Nguyen said in emailed comments on Sunday. 

Russia has $117 million worth of coupons on dollar bonds coming due on March 16 that don’t have the option to be paid in rubles, the JPMorgan strategists said. If Russia decides to pay in rubles following Putin’s decree, “that would be an event of default and would trigger CDS,” Nguyen said.

Fortune lists tables of bonds, due dates, and face values. 

Crash Russia

The China Connection

Export Controls

Central banks have effectively forced Russia to default, a curious position because Russia maintains its reserves instead of spending them.

This isn't war? 

The amounts are small, relatively speaking. However a ripple impact from missed payments is possible.