Russia towards default: bankrupt state railways. Moscow warns: "We will sue"

Another dough for President Vladimir Putin. The Russian State Railways have been declared by default, after failing to make interest payments on a Swiss franc green bond due to international sanctions imposed on Russia following its invasion of Ukraine. And Finance Minister Anton Siluanov in an interview warns that Moscow will take legal action if it is declared insolvent by the West, in response to the fact that the rating of Russian foreign currency debt was downgraded by S&P from CC to SD, i.e. in selective default. 

The last time Russia defaulted was in 1998 but today's situation is very different because objectively Moscow has the resources to make payments and probably has the will to do so, but it pays the impact of international sanctions imposed for the conflict in Ukraine. Before the invasion, the rating agencies placed Moscow in the "investment grade" category, ie countries for which the possibility of a default is a very remote hypothesis.

The the Russian group Alrosa, one of the largest diamond mining groups in the world, has announced that it cannot pay a debt worth 11,6 million dollars due to the sanctions - which came from the United Kingdom and the United States - according to reports from the Interfax agency. Measures that "make it technically impossible to repay this debt," Alrosa told Interfax. The group has not specified whether it will repay in rubles or at all, but, in any case, it is exposed to default.

Russian Railways in default after non-payment of coupons

The Russian state railways, Russian Railways (Russian counterpart group of our FS) have been declared in default, after failing to pay on notes issued to guarantee a loan of 250 million Swiss francs last month. Bloomberg writes it, explaining that the payment of the coupon should have taken place by March 14, with a 10-day grace period (set for March 28, considering only working days) according to the UK Credit Derivatives Determinations Committee, the body that regulates the international terms of credit management on derivatives. Russian State Railways attempted to pay the coupon on the bond, but could not reach the holders due to "legal and regulatory compliance obligations within the correspondent banking network".

Among the creditors of Russian Railways is also Unicredit which disbursed loans of 545 million to the company.

S&P, Russian currency debt in "selective default"

The situation of Russian debt in foreign currency is complicated. Over the weekend, ratings agency Standard & Poor's downgraded the credit rating of Russia's foreign currency debt from Cc/ca Sd/Sd to 'selective default', a notch above default. This is because the Kremlin on April 4th decided to make coupon and principal payments in rubles Eurobonds denominated in dollars.

But what creditor would accept payment in a currency unable to appreciate against the dollar?

The rating agency does not currently expect investors to be able to convert payments made in rubles into dollars, or the Russian government to convert them into foreign currency "within a 30-day grace period." A circumstance also due to the tightening of sanctions against Russia expected in the coming weeks, which "will hinder the willingness and technical capacity of the country to honor the terms and conditions of its obligations towards foreign debtors".

In addition, S&P announced that it does not currently know whether funds transferred by the Russian government for debt payments on local currency bonds to Russian national accounts may not be accessible to some or all non-resident bondholders, therefore does not have detailed payment information. Hence the decision to downgrade only foreign currency debt, while unsolicited ratings remain at Cc/ci level for local currency issuers, which are however under review with "negative implications".

 S&P also recalls that it has proceeded with the withdrawal of its unsolicited ratings on Russia, following the EU decision of 15 March to prohibit the provision of ratings to legal persons, entities or bodies established in the country, to meet the deadline of the next April 15th.

Russia towards default: "No bonds in 2022"

Still on the subject of default, Russia will not issue bonds in 2022 due to "adverse market conditions". The finance minister said so Anton Siluanov in an interview: “We do not plan to go to the domestic or foreign market this year. It makes no sense, because the cost of such a loan would be cosmic."

Furthermore, the minister says that Russia is ready to take legal action if the West declares the country a default on Eurobonds because "all necessary measures have been taken to ensure that investors receive their payments" but that "policy aware of Western countries is to artificially create a default,” Siluanov added.

“This will not be an easy process. We will have to demonstrate our position very actively, despite all the difficulties”, continued the minister without specifying, however, which legal body Russia will address.

Finally, the minister indicated that Russia's external debt represents 20% of all debt which is worth a total of 261 billion dollars. Meanwhile, the Russian government will increase the contingency reserve fund by 273,4 billion rubles, or $3,4 billion, according to the Tass news agency. economic stability given the sanctions imposed on the country.