Russia’s default risk has increased as investors have reacted to the possibility that the Biden administration will completely block the issuance of bonds from the country to US investors from next week.
The move could be the final straw in Russia’s debt story, pushing the country into its first foreign default in a century. Despite widespread sanctions, it has so far managed to avoid it, thanks to a U.S. waiver that has allowed U.S. investors to issue bonds.
On Wednesday, however, Treasury Secretary Janet Yellen confirmed that the waiver was unlikely to be extended until May 25.
“The expectation was that it was time-limited,” he said in the German forest.
Insurance on Russian sovereign debt – used to protect investors against non-payment – jumped on Wednesday, indicating a 90% chance of default within a year. That probability rose to 77% on Tuesday, according to ICE Data Services.
Russia has so far been able to meet all its sovereign debt obligations, breaking the embargo imposed after the invasion of Ukraine. This includes the 11th-hour escape earlier this month, when Moscow was allowed to make blocked payments after tapping its internal dollar reserves. While Russian corporations have not been so fortunate, billions of dollars of debt are now in technical default.
Finance Minister Anton Silvanov reiterated on Wednesday that Russian foreign investors have no intention of defaulting on about 20 20 billion in sovereign debt, and that the ruble will pay off if the transfer is blocked, according to the Tas News Service.
In April, Silvanov promised to sue Russia if it was forced to violate its obligations.
Subsequent debt transfers to Moscow on foreign bonds maturing May 27, 2026 and 2036. These payments are at risk if US investors are barred from receiving Russian funds, although Russia has a 30-day grace period to find a solution. It did earlier this month.
Both bonds have provisions to allow payments in other currencies, but it is unclear whether this will help Russia overcome the latest U.S. hurdle.
2026 Dollar-denominated but allows payments in Euros, Swiss francs or sterling as well as interest payments in dollars on accounts in Switzerland, the United Kingdom or the EU.
The Euro-denominated 2036 bond contains an additional clause that allows payments in rubles.
However, if Russia wants to use the alternative currency, lenders will have to give notice. While this is five days for the 2026 bond, it is 15 days for the 2036, suggesting that it has already missed the window.
The 2026 note fell 33% to 16 cents on Wednesday, according to CBBT data compiled by Bloomberg. This is the lowest level since mid-March, when Russia was able to repay its first external debt since the invasion of Ukraine, thanks to the OFAC curveout. The bond, which matured in 2036, changed little.
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