A committee ruled that Russia is already in a “possible default” on its sovereign debt

A group of derivatives experts ruled Wednesday that Russia could be in default after it failed to make a payment in US dollars on April 4 on two sovereign bonds, which could lead to the payment of billions of dollars in default insurance.

The Credit Derivatives Determination Committee said that there had been a “possible default”, after Moscow made a payment in rubles instead of the dollars it had to pay under the terms of the instruments.

Moscow said it had to make the payment in rubles after the US Treasury prevented Russia from using any of its frozen foreign exchange reserves to service its debt.

Moscow has a 30-day grace period for the payment of $649 million, which ends on May 4.

In addition, Moody's said in a statement published last week that the April 4 payment of two bonds with maturity in 2022 and 2042, in rubles instead of US dollars, “changes the terms of payment of the original contracts and, therefore, can be considered a default” if Moscow does not pay this debt before March 4 May.

“Bond contracts do not provide for any reimbursement in a currency other than the dollar,” Moody's adds.

“Although Eurobonds issued after 2018 allow, under certain conditions, refunds in rubles, those issued before 2018 (including bonds from 2022 and 2042) do not contain this alternative currency clause or only allow reimbursement in other hard currencies (dollar, euro, pound sterling or Swiss franc)”, details the agency.

On April 9, the financial rating agency S&P Global Ratings already announced that it had lowered Russia's rating for its foreign currency payments to the level of “selective default”, precisely because Moscow had settled the debt mentioned by Moody's in rubles.

Russia has not stopped paying its foreign debt since it renounced the tsarist debt after the Bolshevik revolution of 1917.

The commission's decision could trigger the payment of so-called credit default swaps or insurance against credit default (CDS), instruments that offer investors a guarantee against exposure to specific risks, in this case the non-payment of Russia's sovereign debt.

Investment bank JPMorgan estimated last week that there are currently $3.43 billion of net CDS from Russia to be liquidated.

The committee that decides the possible payment of credit default swaps on Russian sovereign debt consists of members of major banks and investment firms, such as Bank of America, Citibank, JPMorgan Chase and PIMCO.

A country is considered to default when it cannot fulfill its financial commitments to its creditors, which can be States, financial institutions (International Monetary Fund, World Bank, etc.) or investors in the financial markets.

It is partial or selective when the State reimburses part of its obligations.

(With information from Reuters and AFP)

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