Bloomberg: Why Russia can not shake off the risk of bankruptcy

Russia narrowly avoided bankruptcy last week, but markets still estimate it is on the brink of collapse, according to Bloomberg.

Bonds are stuck at risk levels and five-year credit default swaps give an 87% chance of bankruptcy. These odds are lower than in April, but they are still high.

The reason; The tendency of international governments towards stricter sanctions and wider restrictions keeps investors in the dark about the possibility of getting their future payments due. Even if Moscow continues to push for money through the maze of rules, success is by no means guaranteed.

“Russia will probably go bankrupt eventually,” said Elena Daly, founder of EM Conseil, a Paris-based consulting firm that specializes in managing public debt. “In 2008-09 we saw how fast the foreign exchange reserves could melt. It is not only the forthcoming debt service payments, Russia also has to finance the war machine and the vital imports.”

The existing measures imposed on Russia after its invasion of Ukraine have already seriously complicated the payments, hindering and blocking the movement of money.

Creditors then look for a critical loophole that has allowed investors to continue to receive bond payments. The Exemption – General License 9A, issued by the U.S. Office of Foreign Assets Control – is set to close on May 25, two days before the $ 100 million vouchers expire.

In the event that the US Treasury Department extends the exemption, Russia can continue to pay through its unapproved banks, provided it has the dollars and other currencies inside the country. The US sees this as a way to force Russia to burn local savings. But for now, Moscow has plenty of cash, thanks to the billions flowing in on a weekly basis from sales of oil, gas and other commodities, including to Europe.

But if the exemption expires and European Union and UK regulators impose similar restrictions, bankruptcy will return to the table, as another major payment route will be cut off.

Currency options

A possible bankruptcy “will still be determined by Russia’s willingness to pay, but geopolitical and political considerations, as well as the situation on the ground, are just as important,” said Natalia Gurushina, an economist with a stable income strategy in emerging markets. at Van Eck Associates Corp.

At the moment, governments around the world are moving towards tougher sanctions against Russia. The EU is proposing a ban on Russian oil imports and reducing its dependence on the country’s gas, affecting a key source of funding for Moscow.

This keeps investors focused on every step Russia takes to service its public debt. The two interest-bearing bills on May 27 are trading below 30 cents, although their terms include currency solutions. These choices could become irrelevant, however, if the UK and the EU reflect a possible end to the US exemption.

One of the bonds – a dollar installment ending in 2026 – allows payment in euros, Swiss francs or sterling, as well as interest payments in dollars to accounts in Switzerland, the United Kingdom or the EU. If the borrower chooses this alternatively, it must give creditors at least five days notice, according to the bond documents.

The 2036 bond in euros has an additional clause that allows payment in rubles. This is a small consolation for foreign investors: with international clearing houses no longer processing Russian transactions, the funds are likely to remain in the National Settlement Reserve of Russia or be transferred to a “Type C” account in Russia opened in the name of bondholders.

The next government transfer that provides for payment exclusively in dollars is on June 24, when the interest on a 2028 government bond expires, according to data collected by Bloomberg.