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Russia recently announced it would pay bondholders approximately $650 million on two overdue Eurobonds, avoiding falling into sovereign default. Importantly, the payment was in dollars and not rubles as Russia previously had threatened. Circumstances are as follows.
(1) Payment on the bonds initially was due April 4th. In advance of payment, Russia announced it would either buy-back the bonds or make required payments to those who declined the bond buy-back. Russia indicated this payment would be in rubles, not dollars as promised. Roughly 75% of bondholders, likely all domestic, accepted the terms of this agreement.
(2) On April 6 Russia announced it would deposit rubles into an account set up for bondholders. The Credit Derivatives Determinations Committee, whose role is to apply definitions within credit default swap documentation (roughly, insurance products on bonds), subsequently determined that Russia would default on its bonds if it insisted on paying bondholders in rubles rather than in dollars. This likely would have accelerated requests for payment on other outstanding Russian debt, further weakening the country and its economy.
(3) Subsequently, as above, Russia reversed its position and made bond payments in dollars as promised.
While some characterize this as a ‘win’ for Russia, others suggest this may not be so. Russia’s payment to domestic bondholders was in rubles which no longer are convertible to a currency that they can spend abroad. Meanwhile, foreign bondholders received full payment in dollars.
Others note this payment likely required Russia draw down its foreign currency reserves which now are dwindling. Between February 4th when Russia invaded Ukraine, and May 5th, Russia’s energy sales to the EU provided Russia with $22 billion in revenue. Now the European Union plans to phase out the purchase of Russian oil and gas. This adds to other sanctions including a ban on the transportation of Russian oil by EU members and prohibiting providing insurance and liability coverage for tankers involved in such transport. Canadian, EU and US firms provide the vast amount of such insurance.
Observers indicate Russia still has some fight left in this geo-economic war. For example, Russia still tries to demand payment for remaining energy sales in rubles. This could marginally help Russia evade financial sanctions and support the demand for, and hence exchange value of, the ruble. At the same time, this would leave Russian energy suppliers without foreign currencies to make debt payments or purchase supplies abroad.
