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Russian sovereign default more symbolic at this stage

  • Russia’s government has now reportedly defaulted on its foreign-currency denominated debt for the first time since 1918, but this is a largely symbolic event that is unlikely to have an additional macroeconomic impact. Sanctions have already done the damage and locked Russia out of global capital markets.
  • On Sunday, Russia reportedly failed to make a $100mn coupon payment during a 30-day grace period on a bond that was due on 27th May. The Russian government has said that its obligations were paid in full before the due date and that the international settlement and clearing systems have not taken the necessary steps to process the funds (this comes after the US Treasury let a special licence for US investors to receive funds from the Russian government expire on 25th May, see here).
  • A default is significant insofar as it shows the effectiveness of the Western sanctions regime against Russia, but is not a big deal for Russia’s economy. The cost of default for a sovereign is being locked out of global capital markets or the prospect of a prolonged period of high borrowing costs. Russia had been in default for more or less three months as far as bond investors were concerned. (See Chart 1). And sanctions have already prevented the government from accessing capital markets – US investors are prohibited from purchasing any Russian government debt and the government has halted new issuance.
  • Russia was an infrequent debt issuer on international markets anyway and the outstanding value of its FX bonds amounts to $37bn; comparable to Chile and the Philippines whose economies are 80% smaller. (See Chart 2.) The boost to the public finances from high oil and gas prices limits the government’s dependence on foreign financing too. Restrictions on energy exports will bite harder and the government will eventually return to the bond market. But interest rates and domestic financing conditions are now as loose as they were in January and the government will likely lean more heavily on domestic banks to hold more debt.
  • What’s more, the spillovers to the rest of the world should be limited. A default is clearly a big deal for those investors that hold Russian Eurobonds (and are therefore due interest) as well as those that have taken out protection in the event of a default (the settlement process for CDS contracts could get messy, see here). But only around half of Eurobonds are held by non-residents ($19bn) and the government will continue to service those debts in which ruble payment is allowed in the contract ($11bn in total by our estimates).
  • What happens next? Payment on some of the Eurobonds will probably fall due as a result of early repayment clauses, although it’s not clear whether investors will accelerate this process. The government will continue to meet its Eurobonds in rubles (and default on more bonds) through a mechanism that looks similar to the ruble-gas payment scheme. And there will likely be a legal case brought by the Russian government as it has claimed that the issuance documentation for the bonds does not include any mention of a default event due to third parties. In any case, there will be little bearing on the depth of Russia’s downturn.

Chart 1: Russia Sovereign 2036 Eurobond Price

Chart 2: Sovereign FX Debt Outstanding ($bn, Latest)

chart001-296.pngchart002-228.png

Sources: Refinitiv, Capital Economics

Sources: Refinitiv, Capital Economics


Liam Peach, Emerging Europe Economist, +44 (0)20 7808 4990, liam.peach@capitaleconomics.com