Russia warns sovereign bondholders that payments depend on sanctions

Russian ruble coins are shown in this illustration taken, February 24, 2022. REUTERS/Dado Rovich/Illustration/file image

LONDON (Reuters) – Russia said on Sunday that sovereign bond payments would depend on sanctions imposed by the West over the invasion of Ukraine, raising the specter of its first major foreign bond default since the years after the Bolshevik Revolution of 1917.

Russia’s Finance Ministry said it would serve and repay the sovereign debt in full and on time, but international sanctions could hamper the payments.

“The actual possibility of making such payments to non-residents will depend on the restrictive measures imposed by foreign countries in relation to the Russian Federation,” the Ministry of Finance said in a statement.

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

From now on, Russia will use the ruble to make payments to residents on bonds denominated in foreign currency, the ministry said.

The Moscow Finance Ministry has also openly said that Russia may not be able to make bond payments due to restrictions imposed by the Russian government.

In 1998, Russia defaulted on $40 billion in domestic debt and devalued the ruble under President Boris Yeltsin because it effectively went bankrupt after the Asian debt crisis and plunging oil prices, which undermined confidence in its short-term ruble debt.

This time, Russia has the money but can’t pay because the reserves – the fourth largest in the world – that Putin ordered to build for such a crisis have been frozen by the US, EU, Britain and Canada.

This could be Russia’s first major debt default in more than a century. Even when the Soviet Union collapsed, Russia assumed its foreign debt.

In 1918, the Bolshevik revolutionaries under Vladimir Lenin abandoned the tsarist debt, which shocked the world debt markets because at that time Russia was suffering from one of the largest piles of foreign debt in the world.

Since bonds are worth nothing, some holders of tsarist notes have used them as a backdrop. The Soviet Union led by Joseph Stalin stopped servicing loans to the United States and Sweden after World War II.

Russian default

While Russia has only $40 billion in international bonds maturing across 15 dollar- or euro-denominated issues, its companies have accumulated much larger external debt.

Eurobonds are issued with a mixture of terms and contracts.

Notably, the bonds sold after sanctions were imposed on Russia over its 2014 annexation of Crimea contains a provision for alternative currency payments in dollars, euros, sterling or Swiss francs, with the ruble listed as an alternative currency option for bonds issued since 2018.

On March 16, Russia is set to pay $107 million in coupons via bonds, although it has a 30-day grace period for the payments to be made. The next “basic” full payment is a $359 million 2030 bond on March 31, then a larger $2 billion maturity on April 4.

Russian gas giant Gazprom has $1.3 billion in bonds maturing on March 7.

According to JPMorgan, OFZ’s bond market totaled 15.5 trillion rubles, or about $200 billion at ruble rates for January, with foreigners owning just under a fifth of the bonds.

Earlier on Sunday, Moody’s downgraded Russia’s credit rating to Ca, the second lowest in the rating scale, citing central bank capital controls likely to restrict the country’s foreign debt payments and lead to default. Read more

Moody’s said its decision was prompted by “serious concerns about Russia’s willingness and ability to repay its debt obligations.”

The rating agency said default risk had increased and foreign bondholders were likely to recover only a portion of their investment.

Moody’s and its peers Fitch and Standard & Poor’s Global scored Russia at Baa3/BBB investment grade levels as recently as March 1. Since then, the three companies have lowered their ratings by several notches, sending Russia’s sovereign debt deeper into so-called “junk” territory.

(1 dollar = 121.0370 rubles)

(Reporting by Guy Faulconbridge) Editing by David Goodman

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