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The Moscow Exchange MICEX-RTS building in Moscow on Feb. 24, 2022.

The Moscow Exchange MICEX-RTS building in Moscow on Feb. 24, 2022. (Andrey Rudakov/Bloomberg)

Russia was judged to have breached the terms of two bonds by a derivatives panel, marking another milestone on the nation's path to its 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, Barclays and JPMorgan Chase, said the potential failure happened on April 4.

The nation could still avert a default if it pays bondholders in dollars before a 30-day grace period 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. "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."

The payment issue is just one example of the fallout from the sanctions imposed on the country because of its invasion of Ukraine. The extensive restrictions have cut it off from the financial system and complicated transactions that were previously executed smoothly and with little attention.

That means for now, Russia is on the brink of its first default on foreign borrowings since the Bolshevik repudiation of Czarist debt in 1918. The clock is ticking on the grace period before the sovereign is likely to be officially declared in default. Holders of the swaps can then start the process of getting paid on contracts covering about $40 billion of debt.

Russian companies are increasingly being caught up in the sanctions turmoil. The CDDC has already ruled that Russian Railways JSC swaps will be triggered after a bond payment was blocked.

This week alone, three of Russia's largest banks missed interest payments due on their bonds.

VTB Bank, Alfa Bank and Russian Agricultural Bank were all slated to pay coupons on their subordinated notes over the past few days, yet no transfers reached foreign investors, according to people familiar with the matter, who spoke to Bloomberg on the condition of anonymity.

Alfa Bank said it's "technically impossible to fulfill obligations under the eurobonds," despite having the cash to pay. Russian Agricultural Bank sought permission in advance from the Bank of Russia to make the payment, and also asked the paying agent — BNY Mellon's London branch — to send the appropriate instruction to the central bank.

VTB, meanwhile, made the payment in rubles, according to Russian newspaper Vedomosti. Bondholders based in Russia and "friendly" countries were credited directly to their ruble accounts, while investors in "hostile" nations received rubles on "Type C" accounts held in Russia, the paper reported.

The official sovereign default declaration would traditionally be made by ratings firms, but all have withdrawn coverage of Russia to comply with a European Union ban.

However, S&P Global Ratings took the step of cutting the government to "selective default" before its exit. Moody's Investors Service then said Russia's ruble payments on the dollar bonds would be "considered a default" if the situation isn't remedied within the grace period. It added that the comments didn't constitute a credit rating shift.

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.


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