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The 9C license which allows Russia to service its foreign debt has expired, said the Office of Foreign Assets Control (OFAK.) This circumstance might bring Russia closer to default in case the Ministry of Finance does not have several issues of relatively new bonds with the option to pay in rubles when it is impossible to pay in dollars on the external debt. In this case, redenomination of payments (change in the currency of payment) will be recognized as a default.
It should be recalled that Russia has sovereign bonds worth more than $30 billion. Due to sanctions imposed by the West, there may be various problems with the Central Bank, the Ministry of Finance and the National Welfare Fund (NWF) transferring money to foreign investors through foreign banks in US dollars. As a result, U.S. banks and citizens would be prohibited from receiving payments on Russian bonds.
However, Russia decided not to wait for restrictions and began transferring money on the Eurobonds last week. The Russian Federation is to pay about $100 million, but the Ministry of Finance, as a precaution, listed coupon payments in the currency of the issues – dollars and euros – for two issues maturing in 2026 and 2036. Since the next scheduled payments are now due in June, there is still time to make further decisions.
According to Olga Belenkaya, Head of the macroeconomic analysis department at Finam Group, the Ministry of Finance may pay the coupons on these Eurobonds to the National Settlement Depository (NSD) already “in the ruble equivalent.” However, this will happen if no other “viable option” of circumvention is found.
Incredible as it may seem, Russian holders of Eurobonds are likely to even benefit from this, receiving funds in rubles, as their access to payments in foreign currency, transferred by domestic issuers to Eurocler, is limited because of the inoperative interdepository bridge.
European investors, who are the main holders of Russian bonds, can also receive coupon income. As for our American “partners,” i.e. investors from the USA, the non-renewal of the license will hurt them first of all, because American funds account for about 10% of Russian sovereign bonds.
In fact, if the license is not renewed, the Americans simply will not see their money, because its cancellation prohibits both transferring and receiving money to investors from the United States. Yes, they can initiate a default procedure, but in order to declare a default, they have to have applications from at least 25% of the holders.
According to Belenkaya, the consequences of a possible default for our citizens and our economy “will be minimal” under the existing circumstances. In this regard, the State Duma said that Russia will pay its foreign debt in rubles, especially since it already has experience of mutual settlements in gas contracts in rubles, and an artificial default, which we are pushed to do, will not affect Russia.
Meanwhile, the Ministry of Finance is making every effort to avoid a default, as it could make it difficult for Russia to attract funding even from friendly and neutral countries, the cost of borrowing would increase, and after the sanctions are lifted, it would be more difficult to return capital to international markets.
Investors, of course, are well aware that a default on the Russian debt in no way indicates Russia's insolvency. In the opinion of the expert community, assumptions about default may be “information noise” aimed at shacking Russia from the inside. However, Russian citizens should have no reason to worry about non-payment of wages or the shutdown of businesses in any case, because there is money in the country.
In case of a technical default on the Russian debt, “nothing will change in the lives of Russians,” said Minister of Finance Anton Siluanov. According to him, a technical default is a default announced, in fact, by a Western structure to its own investors.
“Russia is a reliable borrower, and we have been complying with all the agreements, even in these difficult conditions, and will continue to do so. We are already preparing options to fulfill our obligations on foreign debts as well,” Siluanov said in conclusion.