An industry body that oversees the credit-default swap market ruled on Wednesday that the Kremlin failed to meet its obligations to foreign creditors when it paid off with the ruble earlier this month, leaving Russia behind on its sovereign debts. But one is approaching the default.
Russia paid bondholders in rubles on 6 April after the US barred Russia from using US banks to make payments on its dollar-denominated bonds. The Russian finance ministry said it had attempted to remit dollar interest payments due to bondholders through JPMorgan Chase & Co, but the bank refused to process $649 million in payments because the US Treasury did not approve. was given.
The 14 counterparties that oversee the credit-default swap market, including investment banks, asset managers and brokerage firms, ruled Wednesday unanimously that borrowers fell short of meeting their debt obligations because investors did not receive outstanding dollars.
Following the decision, a credit-default swap tied to the Kremlin’s creditworthiness could be triggered if Russia fails to pay the dollar before the grace period ends on May 4. This would be Russia’s first default on foreign loans since 1918.
Credit-default swaps are derivative contracts that ensure that investors receive full compensation in the case of an underlying bond default. According to JPMorgan Chase, approximately $4.5 billion of credit-default swaps are tied exclusively to the Russian government, and an additional $1.5 billion is located inside derivatives indexes.
Russia, for its part, has been denying that it is close to default on its sovereign debts, as it has made payments in rubles in special accounts inside Russia that creditors can access, with some restrictions.
However, analysts said that for the two dollar denomination bonds in question, payment in a currency other than the greenback would be a breach of contract.
“There is no provision for repayment in a currency other than dollars in bond contracts, and payments in rubles “may be considered a default” if not resolved by May 4,” analysts at Moody’s Investors Service said in a report last week. is done.
The cost of credit-default swaps to protect against Russian government default has skyrocketed after war broke out between Kyiv and Moscow and allied governments imposed sanctions on the Russian financial sector.
As of Wednesday, the upfront cost of buying a five-year contract for a Russian credit-default swap accounted for about 73% of the total value of the loan to be insured, which has a default probability of 93%, according to data from ICE Data Services. Inc. This compares to a cost of about 40% in early March and 5% in early February.