To what extent is Vladimir Putin’s Russia at risk of default? And is the country really in danger of default? According to the major rating agencies, which have already rejected the rating of Russian government bonds at the junk level, the answer is yes.
Fitch spoke of an imminent default on Russian bonds, and a few days ago Moody’s warned that default risk still remains very high, in light of “the marked deterioration we have seen in recent weeks in the government’s ability and intention to meet debt obligations.”
In fact, there is also the element ofactual intention, on the part of the Kremlin, to comply with the obligations and repay the amounts owed to the holders of its sovereign bonds.
Moscow could, in this regard, choose the path of voluntary defaultrefusing to comply with the obligations it has towards those international investors who are in any case part of the circle of, to use Putin’s words, “hostile countries” that have hit it with sanctions.
There are some crucial dates. One is certainly that of May 25th, the day on which the waiver granted by the US government to US counterparties to receive payments from the Central Bank, the Ministry of Finance and the Russian sovereign wealth fund will expire. But first, there are other equally crucial deadlines for monitoring Russia’s ability – and willingness – to repay bondholders.
So far, it must be said, Moscow has managed to dodge the default: In mid-March, paid $ 117 million in coupons on two Eurobonds, one day after the deadline but well on time, considering the 30-day grace period (starting on the maturity day) granted. Payment was made in dollars. A few days later, Moscow honored another payment.
Default also dodged yesterday, with a payment of nearly $ 447 million – including coupons for $ 87.5 million and the repayment of the capital of $ 359 million – of a debt maturing in 2030: JP Morgan, who had already handled the transfer of the repayments, received the sum to be allocated to those in charge on a previous occasion.
A Bloomberg article published a few hours ago pointed out that Russia has also paid interest and repaid the principal of the $ 2 billion dollar-denominated bonds due April 4, with the Ministry of Finance also offering to buy back part of it. of debt.
Someone says that in reality Russia is not at risk of default: thanks to the record numbers of its trade balance, which highlight a respectable trade surplus:
It would basically appear that Moscow has good defenses against the recent sanctions imposed by the West, thanks to a strong current account balance sheet and its financial buffer that has been built through the accumulation of international reserves, as well as from the continued revenue from exports of gas and oil.
It must be said that the country collects nearly 1 billion a day from oil and gas sales, revenues that are used largely to defend the economy and try to stabilize the ruble.
Is Russia in danger of default? Answer Binot (La Française)
To the question “Russia is in danger of default” answers, among others, Gaël Binot, manager of La Française AM’s emerging markets fixed income divisionwhich takes stock of the situation, summarizing the events that have affected the Russian debt since the beginning of the conflict between Russia and Ukraine:
“With the raging war in Ukraine and Western sanctions against Russia increasing day by day, especially in the financial sector, an important question arises: is there a risk of a country defaulting on its sovereign debt? The three major rating agencies (S&P, Moody’s and Fitch) downgraded the country’s rating to a level close to default. On March 17, S&P said: At this point, we consider Russia’s debt highly exposed to non-payment. For financial markets, the probability of default over a five-year horizon is very high: currently 88%. (Fonte: Bloomberg, 23/3/2022)”.
Two questions come to mind, Binot points out: can Russia meet the payments due on its loans (interest and principal) and do you want to do it?
Here are some data that the manager highlights:
- The Russian public debt is equal to 18% of the country’s GDP (Source: IMF WEO October 2021), which makes it one of the least indebted countries in the world.
- Moreover, Russia is currently in budget surplus and has accumulated substantial foreign exchange reserves after the annexation of Crimea in 2014, coming to hold 643 billion dollars of foreign exchange reserves (Source: Bank of Russia, as of 18/02/2022) and a National Asset Fund that has accumulated 174.9 billion dollars ( Source: Russian Ministry of Finance, 01/02/2022).
- Imports from Russia in 2021 were $ 293 billion (source: Trade Map).
- In the third quarter of 2021, the two-year need to refinance all Russian foreign currency debt (public and private) was $ 129 billion (Source: JP Morgan).
- Russia’s foreign exchange reserves are amply sufficient to cover the country’s main needs related to foreign exchange.
“However – explains Binot – sanctions have proven to be a game-changer. In response to the invasion of Ukraine, the West implemented sanctions to suffocate the Russian economy. The Russian financial sector has been hit by a wide range of sanctions restricting access to international financial markets, to the Swift international payment system and the freezing of some of the central bank’s reserves, amounting to approximately $ 300 billion, according to Reuters.
The United States will allow the receipt of interest payments from the Russian Central and State Bank until May 25. However, as of that date, US citizens will need to obtain a specific license to continue receiving such payments. Russian exports ($ 491 billion in 2021, Trade Map) were also affected, most notably with the US suspension of oil and methane imports. But the energy sector, which accounts for the largest share of Russian exports (43% in 2021 according to Trade Map) has so far not been affected by the sanctions. Europeans are heavily dependent on Russian fossil fuels (99 billion euros of imports from the EU, source Eurostat) and, at the moment, they are reluctant to penalize their main energy supplier ”.
“In response to the shortage of foreign capital and the collapse of the ruble, the Russian Central Bank intervened to stabilize the currency. More recently, it also suspended the sale of foreign currency until 9 September. Under these conditions, Russia still appears to be able to meet its short-term payment obligations, “Binot writes, warning that” however, the longer the sanctions will last, continuing to restrict access to capital inflows and currency. foreign the greater the risk of insolvency for Russia ”.
“It is remembered that “on March 5, Vladimir Putin signed a decree that threatened to reimburse, in rubles, the creditors of hostile countries debt creditors issued in foreign currencies, which can be considered as a default for this type of debt. However, there are several foreign currency issues in circulation that offer the ability to repay creditors in rubles under certain conditions, which would not trigger a default on Russian debt. It is therefore difficult to know which loans the Russian government is referring to. On the other hand, any change in the redemption currency, if not declared in the issuing prospectus, will lead to a country default. Russia is showing that it intends to honor its debt payments… for now. On March 16, the country fulfilled its dollar coupon redemption obligations, for $ 117 million on two issues maturing in 2023 and 2045, thus avoiding an immediate default ”.
However, the manager points out that “there are still about twenty deadlines coming up in 2022” and that, “given the extreme level of tension, it is difficult to predict the Kremlin’s future intentions on a voluntary default. If this were to happen, Russia’s reputation would be damaged and the default would have a lasting impact on the future costs of state financing by international investors. A voluntary default would mark a renunciation by the state of a short-term normalization of relations with the West ”.