[London, 25th Archyde.com]–The US government has postponed the extension of the measures that have allowed Americans to trade in principal and interest payments on Russian government bonds as a special case under sanctions against Russia.
This measure expired on the 25th, and it is inevitable that Russia will default (default) on foreign currency-denominated debt for the first time in about 100 years.
The main questions and answers regarding future developments are as follows.
The U.S. Treasury Department’s Foreign Assets Management Office (OFAC) issued a notice on March 2 allowing U.S. individuals and groups to trade Russian Treasury, central banks, and sovereign wealth funds only for payments of Russian government bonds. did.
Thanks to this measure, Russia has managed to continue paying principal and interest on government bonds, despite being subject to widespread financial sanctions. A total of seven dollar-denominated bonds have been paid since February 22nd.
However, the US Treasury announced on the 24th that it would not extend the special measures. Only US government bond holders are directly involved, but the overwhelming presence of the dollar in the international financial system will make it difficult for holders in other regions to receive Russian payments.
The balance of Russian foreign currency-denominated bonds is about 40 billion dollars. Of this, less than $ 2 billion will be paid by the end of the year.
Foreign currency-denominated bonds are classified into three types. The first is traditional bonds that are settled overseas as usual. The second is a bond issued after Russia’s compulsory incorporation into Crimea in 2014, with provisions for settlement and alternative currency payment at the Russian Federation Securities and Transfer Agency (NSD). The third is a bond issued after 2018, which is also designated for NSD settlement and has a ruble added to the alternative currency.
On the 27th, the interest payment deadline will be 71.25 million dollars for dollar-denominated bonds and 26.5 million euros (28 million dollars) for euro-denominated bonds. The Russian government has begun payment procedures as of last week in anticipation of the expiration of the OFAC special measures.
NSD has already received each amount and announced that it will pay interest in foreign currency on the 27th.
The prospectus for the two bonds states, “For payments of principal and interest (including additional amounts) for global bonds registered under the name of NSD, payments to NSD will be possible under the qualification of a registered holder.” It is written that.
Some experts and the Russian Ministry of Finance are in a position to consider payments to be fulfilled in the form of this wording.
However, it is unknown whether the funds received by NSD will be transferred to the actual government bond holder’s account. According to many definitions of defaults, if no money is in the creditor’s account, it constitutes a default requirement.
Creditors have revealed that as of the 25th, they have not yet been credited to their bank accounts. However, Russia has a 30-day grace period even after the 27-day interest payment deadline.
If the creditor receives the funds on the 27th, Russia will then meet the payment due date on June 23rd and 24th.
June 23, like May 27, is a bond designated for NSD settlement. However, on June 24, when payment of $ 159 million is required, the issue in 1998 requires payment overseas.
Therefore, in the opinion of experts, Russia cannot make payments without the special measures of OFAC.
The interest payment grace period for this bond is set at 15 days.
There is one big problem. It is whether the possibility of late payment is recognized as a “credit event” that causes a credit default swap (CDS) loss compensation payment.
If the International Swaps and Derivatives Association (ISDA) finds it to be a credit event, the CDS seller must make up for the buyer’s loss.
JP Morgan does not expect that if NSD receives payments for bonds that can be settled in Russia, it will not lead to compensation for losses to CDS buyers. “If this money isn’t subsequently transferred to bondholders, it’s still a good condition to avoid CDS credit default swaps,” a team of analysts said in a customer note.
However, if Russia is unable to pay on June 24, it is safe to have credit grounds after the grace period.
According to JP Morgan’s calculations, the nominal balance of Russian-related CDSs is currently $ 2.54 billion. Of this amount, $ 1.68 billion is the CDS of Russia itself, and the rest is the CDS related to the emerging market index.