Pass the Popcorn

With all the talk of Russia possibly defaulting on its debt, an important fact has been missed, that the bond contracts are written to allow payment Rubles if external events prevent the government's access to dollars.

The sanctions are exactly the sort of force majeure envisioned in these contracts, so Russia will not default, though it is likely that the bond holders would be paid in currency that they cannot use:

Russia is teetering on the edge of a possible sovereign debt default, and the first sign could come as soon as Wednesday.

The Russian government owes about $40 billion in debt denominated in U.S. dollars and euros, and half of those bonds are owned by foreign investors. And Russian corporations have racked up approximately $100 billion in foreign currency debt, JPMorgan estimates.

On Wednesday, $117 million in interest payments on dollar-denominated government debt are due.

But Russia is increasingly isolated from global financial markets, and investors are losing hope that they will see their money. As the government strives to protect what’s left of its access to foreign currency, it has suggested it would pay its dollar- or euro-denominated debt obligations in rubles instead. That has prompted credit rating agencies to warn of an imminent default.

What should be noted here is that  Russian bonds, at least since 2016, have had provisions that allow for it to make payments to foreign denominated bonds in Rubles if they are unable to make payments in dollars due to, "beyond its control," and their bonds do NOT had a provision ceding sovereign immunity or allowing foreign jurisdiction of these contracts, which means that these bonds, and associated credit default swaps, very likely have little recourse in US or UK courts.

………

On Monday, Russia’s finance minister, Anton Siluanov, accused the countries that have frozen the country’s internationally held currency reserves of trying to create an “artificial default.” The government has the money to meet its debt obligations, he said, but sanctions were hampering its ability to pay. Mr. Siluanov had also said over the weekend that the country had lost access to about $300 billion of its $640 billion currency reserves.

The government insists investors will be paid. The finance ministry said on Monday it would send instructions to banks to issue the payment due on dollar- or euro-denominated bonds in dollars or euros, but if the banks don’t execute the order then it will be recalled and payment will be made in rubles instead. The statement also said that the payments could be made in rubles and then converted to another currency only when the country’s gold and foreign exchange reserves are unfrozen.

Russia has been dealing with sanctions for some time now, so this could get ugly.

We are already, "Starting to see that uncertainty spill over into CDS markets," so, "Fasten your seat belts, it's going to be a bumpy night."