May 2, 202211:46 AM GMT+7Last Updated 7
days ago
Macro Matters
Russian Rouble coins are seen in front of
displayed U.S. Dollar banknote in this illustration taken, February 24, 2022.
REUTERS/Dado Ruvic/Illustration
NEW YORK, May 2
(Reuters) - Russia may have averted default as it announced it had made several
overdue payments in dollars on its overseas bonds, shifting the market's focus
to upcoming payments and whether it would stave off a historic default.
Russia's $40 billion
in international bonds and the chance of a default have become the focus of
global financial markets since it was hit with sanctions from the United States
and its allies after its invasion of Ukraine in late February.
Dubbed a "special
military operation" by Russia, the invasion has turned Russia into a
pariah, including in financial markets, and has entangled its ability to pay
its debts. read more
The chance of default
dramatically increased in early April when the United States stopped the
Russian government from using frozen reserves to pay some $650 million to its
bondholders. read more
With the end of a
grace period on those payments looming, Russia's finance ministry said on
Friday it had paid, in dollars, $564.8 million of coupon and redemption
obligations on a bond maturing in 2022 and a coupon payment of $84.4 million on
another due in 2042.
The announcement
surprised markets that had been gearing up for a default at the end of the
grace period on Wednesday, which would have been Russia's largest major
external default in over a century.
The Russian finance
ministry announced it paid nearly $650 million it owed holders of two of its
dollar bonds. Two creditors told Reuters they had not yet seen the money in
their accounts, but a senior U.S. government official confirmed that the
payments had been made and that the source appeared to be outside the limits of
the current sanctions.
The Credit Derivatives
Determinations Committee, representing major global banks and asset managers,
met on Friday and acknowledged the reports of Russia's payments, but
nonetheless made plans for a credit default swap auction next week "solely
in order to prepare for the possibility of a Failure to Pay Credit Event."
Russian bond prices
jumped higher according to traders, in some cases by 15 cents, nearly doubling
in price. Bonds of major still-unsanctioned companies such as Gazprom, Lukoil
and telecoms firm VimpelCom were quoted up 2-5 cents too.
Insurance against
Russia's default got less expensive, with five-year credit default swaps (CDS)
linked to Russia’s sovereign debt down to 64.333% upfront from 76.4% upfront on
Thursday, according to S&P Global Market Intelligence.
If Friday's announced
payments clear, attention will shift to two events at the end of May:
1) Transactions
between U.S. persons and Russia's finance ministry, central bank or national
wealth fund are only allowed under a temporary license issued by the U.S.
Office of Foreign Assets Control (OFAC) that will expire on May 25. The U.S.
Treasury has not commented on whether that deadline will be extended. read more
2) Russia faces coupon
payments due on May 27 on a dollar bond issued in 2016 and an euro bond issued
in 2021.
The payment on the
euro bond could be done in rouble as a last resort, but the dollar bond does
not have that provision.
The bonds related to
the April 4 payment did not include rouble payments as an option, which was key
in determining that a "potential failure to pay" had occurred when
Russia tried to pay in rouble.
If last week's
payments clear, Russia's international bond payment obligations through the end
of the year are about $2 billion.
Prior to the Ukraine
crisis roughly $20 billion, or half the outstanding foreign currency issuance,
was held by investment funds and money managers outside Russia.
The threat of Russian
default is peculiar in that Moscow is expected to have the funds to pay its
obligations. The fact that some of its sources are frozen or under sanctions
boils it down to Moscow's willingness to pay from other cash sources, rather
than its ability to do so.
Only half of Russia's
over $600 billion of foreign reserves was frozen as a result of the sanctions.
Even as Europe has
pledged to diversify its energy purchases, Russia has gotten this year, on
average, close to $1 billion a day in revenue from sales of oil, coal and gas.
Reporting by Rodrigo
Campos and Davide Barbuscia in New York, Andrea Shalal in Washington and Karin
Strohecker and Marc Jones in London; Editing by Megan Davies and Gerry Doyle
https://www.reuters.com/business/russia-swerves-avoid-default-what-is-next-2022-05-02/
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