- The Russian government could still default on its foreign bonds within weeks, despite making key payments last week.
- That’s because a key US Treasury rule, which has allowed payments to go through, is set to expire later in May.
- If the Treasury doesn’t extend the exemption, Russia will find it very hard to get its payments to bondholders.
Like Indiana Jones screeching under a closing door in The Temple of DoomRussia managed to avoid default at the very last moment on Tuesday, as bond payments started finding their way into investors’ accounts.
Yet there is still one big obstacle in Russia’s path that means it could easily tumble into default when its next bond payments fall due on May 27.
The US could cut Russia off
Up until now, Western bondholders have only been allowed to receive sovereign bond payments from Russia because of a special rule put in place by the US Treasury in late February.
The exemption—officially called General License 9A — “authorizes US persons to receive interest, dividend, or maturity payments on debt or equity” of the Russian government. It has allowed money to squeak out of Russia, despite the increasingly thick layer of sanctions suffocating the country’s financial system.
The problem for Moscow is that the exemption runs out on May 25.
That’s two days before it must send investors $71 million in coupon payments on a dollar bond, and 36 million euros ($38 million) on a euro bond.
Bondholders and analysts have been left guessing whether the US Treasury will extend the carve-out. A Treasury spokesperson declined to comment.
“They may or may not extend the General License,” Timothy Ash, emerging markets strategist at BlueBay Asset Management, told Insider. “If they give an extension, it’ll be temporary. It could be a month, could be three months. We’ll wait and see.”
Moscow must cough up dollars
Russia is allowed to pay in rubles on the euro-denominated bond, thanks to a fall-back provision in the contract. But it has to cough up the $71 million in dollars.
If investors don’t get their cash, Russia will have defaulted in the eyes of Western financial institutions. Until the country sent through the dollar payments last week, a global committee of banks was poised to declare that Moscow had officially reneged on its debts.
Andy Sparks, an analyst at financial data company MSCI, said in a note this week that market pricing suggests investors still think Russia is highly likely to default.
He said the prices of credit-default swaps — financial contracts that insure investors against default — suggest there’s a 67% chance of a default within the year and an 88% chance of a default in five years.
“A high level of uncertainty continues to hang over the Russian sovereign-bond market,” Sparks said.
Russia claims a default would be ‘artificial’
Russia has argued that Western sanctions are pushing towards an “artificial” default, even though it has the money to pay. The government is still receiving significant revenue from energy exports, and it has access to hundreds of billions of dollars of currency reserves, despite sanctions freezing much of the stockpile.
Yet such an argument is “ludicrous,” according to Ash. “Geopolitics is a key part of the country’s credit story. You can’t ignore it.”
Including the $109 million due May 27, Russia still has to make almost $2 billion of bond payments this year.
It had around $39 billion of foreign-currency denominated bonds outstanding as of January, according to analysts at JPMorgan, $20 billion of which was owned by foreign investors.
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