Analysts Warn Russia En Route To First External Debt Default
With much of Moscow's $640 billion reserves under lock and key in the West and sanctions crippling cross-border capital flows, investors fear Russia may be heading for its first-ever default on sovereign hard currency debt, Karin Strohecker reported for Reuters.
Photo Insert: Rumor has it that some Russian billionaires are moving their yachts towards Montenegro and the Maldives to evade sanctions on their assets.
On Wednesday, foreign investors were effectively stuck with their holdings of rouble-denominated bonds -- known as OFZs -- after the central bank temporarily halted coupon payments and settlement system Euroclear stopped accepting Russian assets.
A rouble debt default has precedent -- Moscow reneged on OFZs during its 1998 financial crisis, but even then it kept up dollar bond payments. Before the latest devastating Western sanctions which froze central bank assets, such a Russian default was on no one's radar.
That is partly because Russia, which calls its actions in Ukraine a "special operation", has just $40 billion in international bonds outstanding across 15 dollar- or euro-denominated issues -- tiny relative to peers and its own gross domestic product (GDP).
The bonds mostly traded well above par until mid-February, as investors shrugged off Moscow's troop build-up on Ukraine's border and US warnings an invasion was imminent.
Fast forward two weeks and bond investors have come around to the view that default is no longer a distant prospect. Russia's risk premium has soared and credit default swaps - derivatives used to insure exposure - are at record highs. And some dollar bonds now are priced below 30 cents in the dollar, with trading volumes abysmal.
Foreigners, who hold around half Russia's hard currency debt, are focusing on March 16 when it must pay $107 million in coupons across two bonds.
"Will Russia pay or not? There's very significant uncertainty at this point, after the sanctions applied to the Russian central bank and the ministry of finance," said Marcelo Assalin, head of emerging market debt at investment manager and financial services firm William Blair in London, which holds some Russian debt.
JPMorgan and the global banking lobby group, the Institute of International Finance (IIF), have both warned there is a significant rise in risk that Russia could be headed for its first external debt default.