By Karin Strohecker, Andrea Shalal and Emily Chan
June 28, 20223:31 AM GMT+7
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
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Summary
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Grace period ended on
$100 mln interest payment due on May 27
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Russia default shows
dramatic impact of sanctions-U.S. official
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Some Taiwan
bondholders did not get payment on Monday - sources
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Russia says it has
funds to pay, sanctions are to blame
LONDON/NEW YORK, June 27 (Reuters) - Russia
defaulted on its international bonds for the first time in more than a century,
the White House and Moody's 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. read more
Earlier, some bondholders said they had not received overdue
interest on Monday following the expiry of a key payment deadline on
Sunday. read more
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. read more
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". read more
Euroclear did not respond to a request for
comment.
Some Taiwanese holders of the bonds had not received payments on
Monday, sources told Reuters. read more
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.
Reporting by Karin Strohecker in London, Andrea Shalal in Elmau
and Emily Chan in Taipei and Sujata Rao in London; Davide Barbuscia and Rodrigo
Campos in New York; Editing by Megan Davies and Howard Goller
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