Explainer: after Russia swerved to avoid default. What is the next? | Business and economy

Russia may have averted default by announcing it had made several overdue dollar payments on its overseas bonds, shifting market focus to upcoming payments and the possibility of avoiding a default. historical.

Russia’s $40 billion in international obligations and the risk of default have become the focus of global financial markets since it was hit with sanctions from the United States and its allies after its invasion of Ukraine at the end of February.

Dubbed a “special military operation” by Russia, the invasion made Russia a pariah, including in financial markets, and compromised its ability to pay its debts.

The risk of default increased dramatically in early April when the United States blocked the Russian government from using frozen reserves to pay some $650 million to its bondholders.

As the end of a grace period on those payments looms, Russia’s Finance Ministry said on Friday it had paid $564.8 million worth of coupon and redemption bonds on a bond. maturing in 2022 and a coupon payment of $84.4 million on another due in 2042. .

The announcement surprised markets that had braced for default at the end of the grace period on Wednesday, in what would have been Russia’s biggest major external default in more than a century.

What happened on April 29?

The Russian Finance Ministry announced that it had paid nearly $650 million that it owed the holders of two of its dollar bonds. Two creditors told Reuters news agency they had yet to see the money in their accounts, but a senior US government official confirmed payments had been made and the source appeared to be outside. limits of the current sanctions.

The Credit Derivatives Determination Committee, representing leading global banks and asset managers, met on Friday and took note of reports of Russia’s payments, but nevertheless planned an auction of credit default swaps next week “solely to prepare for the possibility of a default to pay credit event.”

How did the market react?

Russian bond prices jumped higher according to traders, in some cases by 15 cents, almost doubling the price. Bonds from large yet unlicensed companies such as Gazprom, Lukoil and telecommunications firm VimpelCom also traded up 2 to 5 cents.

Insurance against Russia’s default has become cheaper, with five-year credit default swaps (CDS) linked to Russian sovereign debt down to 64.333% at the start from 76.4% at the start on Thursday , according to S&P Global Market Intelligence.

What is the next?

While Friday’s announced payouts are clear, attention will shift to two events at the end of May.

First, transactions between the American people and the Russian Treasury, central bank, or national fund are permitted only under a temporary license issued by the United States Office of Foreign Assets Control (OFAC). , which will expire on May 25. The US Treasury has not commented on whether this deadline will be extended.

Second, Russia faces coupon payments due May 27 on a dollar bond issued in 2016 and a euro bond issued in 2021.

Payment on the Eurobond could be made in rubles as a last resort, but the dollar bond does not have this provision.

The April 4 payment obligations did not include ruble payments as an option, which was key to determining that a “potential default” had occurred when Russia attempted to pay in rubles.

How much does Russia owe, and does Moscow have the money?

If last week’s payments are clear, Russia’s international bond payment obligations through the end of the year are around $2 billion.

Prior to the Ukraine crisis, about $20 billion, or half of outstanding foreign currency issuance, was held by investment funds and fund managers outside Russia.

The threat of a Russian default is particular in that Moscow should have the necessary funds to pay its obligations. That some of its sources are frozen or under sanctions comes down to Moscow’s willingness to pay from other sources of cash, rather than its ability to do so.

Only half of Russia’s more than $600 billion in foreign exchange reserves have been frozen as a result of the sanctions.

Even as Europe has pledged to diversify its energy purchases, Russia has earned, on average, nearly $1 billion a day this year in revenue from oil, coal and gas sales. .

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