Russia approaches default: its debt has been downgraded to “selective default” by the S&P agency

Vladimir Putin (Reuters)
Vladimir Putin (Reuters)

Rating agency S&P Global Ratings cut the note on Saturday debt Russian in foreign currency to “selective defaultAfter Moscow paid off a dollar-denominated item with rubles earlier this week.

The agency downgraded the debt note in currencies, such as the dollar, to Category “SD”. and left ruble payments in the “CC” phase, the rating agency said in a statement in which it also reported that it will stop issuing banknotes on Russia, to comply with EU demands.

The “SD” rating is almost the bottom of the scale, one level above the “D” indicating a “default” or a debt default.

“We do not believe that investors will be able to convert these ruble payments into dollars equivalent to the amounts originally due, nor that the government will be able to convert the payments within the 30-day grace period,” estimated S&P.

The expert also indicated it sanctions against Russia for the war in Ukraine could be tightened in the coming weeks, which could hamper “Russia’s willingness and technical capacity to honor the terms and conditions of obligations to foreign creditors”.

As part of the financial sanctions against Russia, the United States announced on Monday that it had prohibited Russia from paying its debt with dollars deposited in the US system. As a result, the JPMorgan bank that was supposed to make the payment blocked the transaction.

Then, on Wednesday, the Russian finance ministry announced that it had paid the equivalent of $ 650 million in rubles due on April 4.

Headquarters of the Russian Central Bank (Reuters)
Headquarters of the Russian Central Bank (Reuters)

– How does debt payment work? –

When a state or company gets into foreign currency debt or pays interest, that amount is transferred from a domestic bank to a foreign bank. The latter must check whether or not it is possible to make the payment and then the sums are transferred to the creditors.

Why so cautious? In November 2018, French bank Société Générale was fined $ 1.34 billion by US authorities for circumventing Washington’s embargoes.

Previously, bank BNP Paribas acknowledged in 2014 that it violated U.S. sanctions against Cuba, Iran and Sudan and paid $ 8.9 billion to avoid a trial in the United States.

– What does a moratorium on the debt of a state mean? –

A country is considered on a moratorium on payments when it is unable to honor your financial commitments to your creditorswhich can be states, financial institutions (such as the IMF or the World Bank) or investors.

Non-payment is considered partial when a state pays only part of its obligations.

The government can default and announce that it stops paying its creditors, as Russia did in 1998 with its local debt. The announcement may also come from a rating agency when the grace period expires.

The termination of payments also had to be formalized by a private creditor or it could be the US agency ISDA, which regulates CDS insurance against non-payment, which declares the “default“.

– Is Russia on the verge of default? –

For several weeks, Russia ruled out the possibility of a moratorium, as the US Treasury allowed the use of foreign currency deposited by Moscow overseas to meet its payments.

In March, Russia repaid the interest, demonstrating its willingness to pay.

As part of the financial sanctions against Russia, the United States announced this on Monday it banned Russia from paying its debt with dollars deposited in the US system. As a result, the JPMorgan bank, which acted as an intermediary to make the payment, blocked the transaction.

Then, on Wednesday, the Russian Finance Ministry announced it paid with rubles the equivalent of $ 650 million maturing on April 4. This resulted in the downgrade of the financial rating of S&P Global Ratings.

The ruble, heavily devalued in recent weeks (Reuters)
The ruble, heavily devalued in recent weeks (Reuters)

The Russian state, like many Russian companies, was pushed into a technical default, an unprecedented event”Slim Souissi, a specialist in bank and sovereign debt insolvencies, explained to AFP.

“The repayment must be made on terms equally favorable to what was originally agreed”, therefore, to the extent that the repayment was in rubles, when the contract stipulated that it was in dollars, this can be considered as an Indian default.

– Who is the referee? –

The other major risk rating agencies Fitch and Moody’s stopped analyzing Russian debt and that of Russian companies as part of the sanctions imposed against Moscow.

The S&P Global Ratings agency, which had planned to stop issuing ratings for Russia after April 15, expressed its latest opinion on Saturday.

– Are there possible legal actions? –

“Theoretically,” creditors can “attempt to take legal action against the Russian state to receive their payments,” Souissi insisted.

Russia can also challenge the “default” and take it to court claiming that it cannot pay the penalties against it.

(With information from AFP)

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