Sign up now for FREE unlimited access to Reuters.com Register LONDON, April 8 (Reuters) – Russia could face its first sovereign foreign bankruptcy in a century after making arrangements to repay an international ruble bond earlier this week, even though the payment was in US dollars. Russia has not defaulted on its foreign debt in the wake of its 1917 revolution, but its bonds have become a hotbed of economic turmoil in the West. A bankruptcy was unthinkable until recently, with Russia being labeled an investment in the wake of its February 24 invasion of Ukraine, which Moscow calls a “special military operation.” Here are answers to key questions: Sign up now for FREE unlimited access to Reuters.com Register CAN RUSSIA PAY? Russia was due to pay $ 649 million to holders of two of its sovereign bonds on Monday. But the US Treasury Department blocked the transfer, preventing Russia from using any of its frozen foreign exchange reserves to service its debt. Having found an alternative, Russia has deposited the ruble equivalent of these payments to bondholders from so-called unfriendly states in special accounts in its National Settlement Depository. Moscow has a grace period of 30 days from the date of payment, which was on April 4. Analysts say Russia has the means and the ability to pay. The country receives billions of dollars in energy export revenues and while about half of its foreign exchange reserves are frozen, it has hundreds of millions that are not. Elina Rybakova, deputy chief economist at the Institute of International Finance, said it was probably a “willingness to pay” situation. The US Treasury Department has not banned bank correspondence with Russia, with checks, and has authorized the payment of payments related to Moscow’s public debt service until May 25. All this means that it seems that Russia could still make the payment, if it wanted to, according to analysts. WHAT TYPE OF DEFAULT? At its most basic level, a default is a breach of contract, although the term can cover a variety of scenarios. Failure to pay is the inability to pay capital, interest or other amounts due after the grace period has expired, according to a document restructured by the International Monetary Fund. However, there are also technical defaults due to events, such as management errors, which are generally considered by market participants to be trivial and quickly corrected. Legal experts say that paying in the wrong currency, in this case rubles, is non-payment. Russia has rejected the concept of bankruptcy. “In theory, a state of default could be created, but it would be a purely artificial state,” Kremlin spokesman Dmitry Peshkov said on Wednesday. “There is no reason for real bankruptcy.” WHO WILL MAKE A DEFAULT? Markets often turn to credit rating agencies to indicate that a bankruptcy has occurred. However, a bankruptcy is a state of affairs, not a credit rating, and with major rating agencies withdrawing their ratings in Russia, it is unclear what kind of announcements could be made. A default will have wider extensions. It could, for example, trigger credit default swaps (CDS) – an insurance policy that investors buy for such a case. An identification committee will look into whether a “non-payment” event has occurred. However, such a decision is generally taken after the grace period has expired. Some $ 6 billion worth of CDS contracts are pending in Russia. WHAT ELSE CAN HAPPEN? Russia could unilaterally declare a moratorium – a temporary or permanent suspension of payments. The moratorium can be made as an announcement or legislation separately from the lost payment, before or after the default, according to the IMF. A government may announce a moratorium as a temporary measure to stop payments before launching a debt restructuring, as Mexico did in 1982. The moratorium is also one of the possible triggers for CDS contracts. WHAT HAPPENS AFTER A DEFAULT? Debt obligations that are in jeopardy or are already in arrears are often discarded by funds that specialize in adverse situations, either hoping to make money when the restructuring is finally completed or to go to court to compensate or seize the debtor’s assets. . However, litigation and seizures of assets are time consuming and costly procedures. Many previous attempts were unsuccessful, such as when creditors tried to seize the famous Argentine navy ship, the ARA Libertad, in 2012 due to debt default a decade earlier or Argentine dinosaur fossils on display in Europe. Sign up now for FREE unlimited access to Reuters.com Register Report by Karin Strohecker. Curated by Pravin Char Our role models: The Thomson Reuters Trust Principles.
