Russia’s switch to making debt payments in roubles has brought the heavily sanctioned country to the brink of defaulting on its debts, according to a leading credit rating agency.
Heaping further pressure on Vladimir Putin’s beleaguered government, Moody’s said that without a return before 4 May to making payments in dollars as agreed under the terms of Russia’s loans, Moscow could be in default, allowing creditors to claim insurance payouts and tainting the country’s reputation as a reliable counterparty.
The warning by Moody’s of an impending default is expected to be met with an angry response from Putin’s administration, which has denied that the rules governing its loans prevent Russia making interest payments in roubles.
In response to a similar declaration last week by Standard & Poor’s that payments in roubles jeopardised Russia’s status as a borrower, the Kremlin said the west had already defaulted on its obligations by freezing its reserves, and that it wanted a new system to replace the Bretton Woods financial architecture established by western powers in 1944.
Sanctions on Russia since its invasion of Ukraine have prevented the Russian central bank from accessing much of the foreign currency it has amassed in recent years.
Earlier this week, Anton Siluanov told the pro-Kremlin Izvestia newspaper that Russia had taken “all the necessary steps” to pay its international creditors.
Russia’s minister of finance suggested it could go to court to argue that the terms of its repayments had been met. “Of course we will sue, because we have taken all the necessary steps to ensure that investors receive their payments,” he said.
If Moscow is declared in default, it would mark Russia’s first failure to pay interest payments on foreign bonds since the currency crisis of 1998, when investor confidence collapsed and the Boris Yeltsin government was unable to sell new bonds on the international markets to finance old ones.
Over the past week, Russia has needed to meet two payment deadlines on bonds it previously sold to foreign investors. The combined interest was worth nearly $650m, and Russia was supposed to have made the payments in dollars, according to the terms of the bond contracts.
It is understood that one of Russia’s major lenders has asked the Credit Derivatives Determinations Committee, a division of a trade body that is made up from representatives of private sector lenders, to judge whether a “potential failure to pay” had occurred in relation to Russia’s bonds.
Russia still has 18 days left of a 30-day grace period before the committee would be able to rule that a “credit event” – a default – had occurred.
Moody’s said: “Russia reportedly made payments on two bonds maturing in 2022 and 2042 in roubles rather than US dollars which represents a change in payment terms relative to the original bond contracts and therefore may be considered a default under Moody’s definition if not cured by 4 May, which is the end of the grace period.
“The bond contracts have no provision for repayment in any other currency other than dollars,” it added.
In 1998 Russia forced lenders to wait 90 days before it made debt interest payments, triggering a technical default. Desperate to keep imports flowing, but without the foreign currency to pay for them, the Kremlin resorted to a barter system with foreign companies and governments, which some analysts believe is being deployed at the moment as a way to circumvent sanctions rules.
The country was bailed out by a rise in the oil price that generated billions of dollars of foreign currency. By the end of 1998 the economy had begun to recover and the government was able to make debt repayments again.
Foreign lenders are concerned that a freeze on Russia’s dollar and euro assets under the current sanctions regime means that a similar recovery and a return to making interest payments in foreign currency will prove to be beyond the Kremlin this time.
If Russia misses debt deadlines, lenders that have insured their loans using credit default swaps will be able to seek insurance payouts.
