S&P Global has placed Russia under a “selective default” rating after the Russian government last week said it had repaid about $650 million in dollar-denominated ruble-denominated debt.
The rating agency said late Friday that it did not expect investors to be able to convert the ruble payments into US dollars equal to the amount originally owed, pushing Russia toward its first foreign currency sovereign debt default in more than a century. .
The bonds have a grace period of 30 days, which gives the Russian government time to repay in dollars or find another way to avoid default. S&P Global said it did not expect the government to convert payments within the grace period.
Sanctions against Russia are likely to be further increased in the coming weeks, hampering Russia’s willingness and technical capabilities to honor the terms and conditions of its obligations to foreign debt holders.
S&P Global’s move came after a dollar-denominated Russian government bond matured and a coupon payment was due April 4. That same day, the US Treasury Department tightened its restrictions on Russian transactions in an attempt to force Russia to choose between wiretapping the dollar reserves it has on hand or using new income to avoid defaulting on its debt. The department blocked Russia from using dollars at US banks for its bond payments, and the transactions were not completed by JPMorgan. Subsequently, the Russian Ministry of Finance said it had paid the debt in rubles.
While the Treasury Department said it believed its debt obligations had been “fully met”, the rating agencies said payment in a currency other than the agreed currency would be a default. None of the bonds with payouts on April 4 had a provision for payment in currencies other than dollars.
After the invasion of Ukraine in late February, sanctions were imposed on Russia, including the freezing of the central bank’s reserves abroad. The rating agencies then downgrade Russia’s debt to junk status and investors bet on default. But for weeks, Russia continued to pay debts. The US authorities allowed the transactions, saying that US bondholders would be allowed to receive debt payments until May 25, despite the sanctions.
If Russia does not repay the debt in dollars, it is unclear how the issue will be resolved. By the time the 30-day grace period on April 4 bond payments ends, European Union sanctions will ban credit rating agencies from providing ratings to Russian entities and will not be able to assess default. The companies are withdrawing all their assessments before the EU deadline of April 15.
Last month, Russian Finance Minister Anton Siluanov accused the countries that have frozen Russia’s internationally held foreign exchange reserves of trying to create an “artificial default”. Last week, the Treasury Department said that if the reserves are thawed, the ruble payments could be converted into dollars.
S&P Global also said Friday that it kept its “CC” junk-debt rating for Russian sovereign debt in rubles (known as local currency debt) because it was unsure whether non-resident bondholders could access their coupon payments.
According to documents on the website of the Russian Ministry of Finance, coupon payments for bonds were made in local currency. But in March, Russia blocked interest payments to non-residents.
“Definitive information about the payment process is not currently available to us,” the agency said.
