Russia Stroked with Potential Default Over Ruble Payment on Debt

Russian to have breached the terms of two bonds by a derivative panel underscoring the country’s first foreign debt default in a century

The Credit Derivatives Determinations Committee said Wednesday that its payment of rubles on two dollar bonds was a “Potential Failure-to-Pay” event for credit-default swaps. The group, which includes Goldman Sachs Group Inc., Barclays Plc and JPMorgan Chase & Co., said the potential failure happened on April 4.

However, the nation could still avoid a default if it pays bondholders in dollar before a 30 day grace period which ends on May 4.

“The bond covenants were pretty clear that ruble payments on dollar debt would constitute default,” said Brendan Mckenna, a currency strategist at Wells Fargo Securities in New York.

She added “come May 4 — unless the logistical challenges around actually making debt payments are cleared, which seems unlikely — I would expect Russia to be declared in default on its external debt.”

This underscores Russia is now on the brink of its first default on offshore borrowings since the the Bolshevik repudiation of Czarist debt in 1918. Holders of the swaps can then start the process of getting paid on contracts covering about $40 billion of debt.

Although the official default declaration would traditionally be made by ratings firms however all ratings firms had to withdraw to company with the European Union ban.

However, before the exit S&P Global Rating took steps in cutting government ratings to “selective default”. Moody’s Investors Service then said Russia’s ruble payments on the dollar bonds would be “considered a default”.

Meanwhile, Russia’s finance ministry has argued that it’s fulfilled its debt obligations. It’s blamed the U.S. and others for blocking payments to creditors, and threatened legal action.