United States Treasury pushes Russia to default: now what?

Russia is due to pay $ 100 million in interest on two government bonds on Friday and pay more in June.

Here are some questions and answers about what might happen next:

What has changed?

The license, issued by the US Office of Foreign Asset Control (OFAC) on March 2, authorized transactions between US companies and the Russian Treasury Department, the Central Bank or the National Wealth Fund.

As a result, Russia has been able to maintain interest and principal payments on its sovereign debt, despite strict restrictions on doing business with Russian companies. From February 22nd. Was able to pay in bonds worth seven dollars.

But the Treasury Department said on Tuesday it would not renew the permit late. While the move will only directly affect US journalists, holders elsewhere will find it difficult to accept Russian payments as the US dominates the world financial system.

How much debt is it?

Russia has $ 40 billion in international bonds outstanding, less than $ 2 billion in foreign debt service until the end of this year.

The loan can be roughly divided into three types: first, the old bonds, which are usually settled by sea, and second, the bonds issued after the annexation of Crimea by Moscow in 2014, which are conducted with Russia’s own national settlement deposit. (NSD) There are settlement and alternative hard currency payment terms.

The latter category also includes loans sold after 2018, which are settled with the NSD, but there are arrangements for payment in rubles.

When are the default fees?

As of May 27, the two bonds have $ 71.25 million and $ 26.5 million ($ 28 million) in interest to pay. More than the OFAC deadline, Russia began the payment process last week.

The Russian NSD – the two-bond payment agency – said it had received the funds and announced on May 27 that it would pay the foreign currency.

The prospectus for the two securities states that “payments related to the principal and interest (including any subdivisions) of the universal securities registered in the name of the NSD shall be paid by the NSD in the capacity of the registered holder.”

According to some analysts, the money was paid, according to the Russian Ministry of Finance.

However, money is unlikely to continue to flow into the securities’ accounts. Russian Finance Minister Anton Siluvanov said on Friday that restrictions on non-residents borrowing capital from Russia would remain in place until Russia’s gold and foreign exchange reserves are released.

By many definitions, it is by default that funds do not appear in the accounts of debtors.

Russia has 30 days after May 27 to make the payment.

What are the next payments?

If the lenders receive the payments on May 27, Russia will have to pay two bonds on June 23 and another on June 24.

Payments due on June 23 – as on May 27 – are payable on bonds settled with the NSD.

However, the latter would have to pay $ 159 million on a bond issued in 1998. Analysts believe that Russia will not be able to pay this fee without the permission of the Treasury, as the problem can only be solved offshore.

This bond has a grace period of 15 business days.

Are Credit Default Swabs Useful?

The question is whether any default will trigger payments on credit default swaps (CDS), which investors use to insure their exposure to specific risks, in this case the default on Russia’s sovereign debt.

A panel of key banks and asset managers should determine if a “credit event” has occurred. In turn, it can trigger payments.

J.P. Morgan expects CDS holders not to pay bonds that can be settled within Russia and paid with the NSD.

“Even if this money is not continuously disbursed to securities, it may be sufficient to avoid a CDS induction,” JPMorgan’s analysts told clients in a note.

However, if Russia does not pay the amount due on June 24, the CDS may be triggered once the offer expires.

Still, a trigger may occur earlier.

The Credit Derivatives Committee will meet on Friday to discuss whether a “debt event” has taken place after Russia failed to add $ 1.9 million in interest during the concession period after paying off its sovereign debt.

Russia currently has $ 2.54 billion in net fictitious CDS outstanding, of which $ 1.68 billion is in the country and the rest is in the CDX.EM index, JPMorgan estimates.