Several market indicators support this assessment. The markets of credit default swapsa kind of financial instrument that protects investors against payment defaults, gives a 70% chance that there is a defect in Russia this year. Fitch Ratings goes further and claims that a fault His “imminent”.
The rating agency commented on Tuesday that if Russia tries to pay in the local currency, the rouble, in light of its criteria which constitute “a violation by a sovereign state”, after the 30-day grace period has elapsed. That would do the fault in these titles took place in mid-April.
As a general rule, when an issuer does not pay a line of obligations, the fault automatically extends to the entire (comparable) debt of this issuer, so that investors can initiate recovery proceedings, including legal proceedings. However, at least in Fitch’s eyes, the the default can be formally declared even earlier, on April 1.
Because? Because March 2 (days before Putin’s decree) partially failed to pay a set of Russian federal debt securities (OFZ) denominated in rubles.
According to Fitch, the information that exists is that the Russian Ministry of Finance has made interest payments on securities held by entities linked to the Russian Treasury “but interest was not paid to foreign investorsdue to restrictions applied by the Central Bank of Russia”, i.e. capital control measures.
Even pointing out to Fitch that it has no “documentation confirming the existence of any grace period” in this type of bond, the agency nevertheless establishes that the Russian Federation has 30 days ( from March 2) to “remedy” this payment. lack. As a result April 1st is already an important date to take into account.
At 11:45 a.m. Lisbon time on Wednesday, Bloomberg reported that holders of some of these dollar-denominated bonds had not yet received payment. And at 12:15 p.m., RIA quoted statements from Russian officials warning that those payments may not reach bondholders. After the close of trading in Europe, another confirmation came, given by two sources to Bloomberg: no one seems to have received a payment notification.
The last time Russia defaulted on its local currency debt payment dates back to the 1998 crisis, but you have to go back to 1918 to find the last time the country defaulted on its foreign currency-denominated debt – it was just after the Bolshevik revolution of 1917. , the protagonists of which did not recognize the debts of the tsar.
The Kremlin’s intention is apparently to make the payment in rubles (at the exchange rate on the day of payment, which is relevant given the sudden devaluation of the Russian currency in recent weeks). But in a statement laden with geopolitical symbolism, Finance Minister Anton Siluanov has hinted in recent days that Russia could dip into its Chinese currency reserves -O yuan – to make payments.
Moscow accuses the West of trying toengender a fault artificialwithout economic justification. Indeed, in recent years Russia has cemented its position as a relatively low-indebted country, with massive foreign exchange reserves spread across the four corners of the world – more than $600 billion, more than half of which are now inaccessible. .
This “strengthening of Russia” has been Putin’s strategy especially since 2014, when (soft) sanctions were applied after the annexation of Crimea. Before this conflict in Ukraine, Russia only had a debt of 13% of GDP (2021 data) and the total external debt was around the equivalent of just $150 billion, less than Portugal’s net foreign debt.
Nearly a third of this debt is held by the federal state itself and much of the rest in the hands of Russian banks. The rest is on the balance sheets. institutional investors such as pension funds, hedge funds (hedge funds) and businesses, including banks.
An example? The New Bank has, as the Observer reported on February 28more than 10 million euros of Gazprom debt that have been tried to get rid of but have failed, given the enormous aversion to anything Russian assets that has existed in the financial markets in recent weeks.
Asked at last week’s press conference, the bank’s president, António Ramalho, declined to elaborate on this exposure to Gazprom, or confirm whether Novo Banco was exposed to other Russian companies.
According to Bloombergmajor global asset managers such as BlackRock and Pimco are already bracing for ‘imminent financial damage’. BlackRock funds exposed to Russia lost 90% of their value shortly after the hack and customers have less than $1 billion invested in these funds, down from around $18 billion at the end of January.
Fidelity and Capital Group managers will also be among the main holders of Russian debt, in addition to the American manager Franklin Resourceswho on February 28 recognized a impairment over more than half of your exposure Russia.
One of Franklin’s funds’ exposure to Russia was $484 million (1.2% of its total assets) and the manager adjusted the value by less than half, on its balance sheet, to $194 million. The question is whether even that valuation won’t be high anyway, given the steep depreciation of Russian assets as the conflict drags on and sanctions pile up.
But it won’t just be these large investors who will be exposed to the country’s bonds. Knowing that until a few weeks ago, Russian public debt and companies had rating Quality, exposure will be quite widespreadeven by funds that only invest in small amounts, replicating global bond indices where Russia was included until very recently.
It is for this reason that the head of the The IMF believes that there will be no “systemic effect”. The amount investors stand to lose by gaining exposure to Russia is not insignificant, however, the fact that bonds have always had rating of quality (until recently) can limit the systemic impact because the bonds are well distributed among a large number of investors – including more cautious investors who will have these securities in diversified portfolios.
The problem is that there was no time to reduce the exposure. “When a default is like a slow-moving train wreck, after years of misguided policies, it is possible to reduce economic impact and losses – by gradually reducing exposure,” says Siobhan Morden, analyst at Amherst Pierpoint , quoted by Bloomberg. “What makes this crisis unique is that it was a sudden shock that caught everyone off guard“, adds the expert.