My question is, did they really default? I am having a difficult time getting all the details but, it seems to me, they didn’t.
Certainly the bond payments did not happen.
But, Russia is claiming they were willing to make the payments but since the west cut them off from SWIFT they could not finish the transaction. They were willing to pay via other means but the bond holders do not want to be paid in other currencies (where they would likely lose money in the transaction).
I am certainly no fan of Russia and what they are doing but is it fair to say you defaulted on a loan if the banks stop you from paying your debt?
The instruments specify not only the schedule of payments, but the denomination (currency) - in the case of today’s news, in Euros.
The scheduled P&I payments (principal and interest) were not made to the bond bearers.
That means the bond is in default by the debt issuer, which in this case is Russia.
Whether you consider “Russia tried to pay but were not allowed to!”, as in, they had those currencies in reserves that are frozen by custodian banks, as a propitiatory factor is another question, for another context.
It’s irrelevant if you’re the bond holder, though. It’s the “the check is in the mail / stuck in a postal truck that got lost / you know I’m totally good for it, man!” type of scenario.
For example, the biggest outcome of someone who owes you money and didn’t pay it on time is that you probably won’t be lending that person more money any time soon. And that’s what happens with bond defaults, too.
Russia can say “not our problem!” all they want, the outcome will be just that: future debt issues from Russia will be viewed as unreliable and thus either avoided or only subscribed to at extremely high interest, because of the past history of “payments owed that didn’t arrive”.
One might argue that Russia had a responsibility to make sure they had Euros in a form that they had control of, in order to pay off the debt. Which they could, in principle, have done. At the very least, they could have had a reserve of Euro notes, and I suspect that there are banking options that would have remained available even through the SWIFT blockade.
Russia saying “we’re frozen from delivery of the Euros we owe you, how about you take some of our nice Rubles instead” is still a failure to meet the contractual obligation.
There’s a reason those bonds weren’t issued in rubles to begin with - Euros being considered far more stable - and that has only become even more true since the Ukraine invasion, why would any debt holder agree to receive in rubles? At what exchange rate? Who’s going to take these rubles from them?
The analogy with personal loans would go like this - a guy who borrowed $10 from you a week ago, promising to pay you $15 next month, now wants to pay you $15 in Pizza Hut coupons, when the nearest Pizza Hut is in another state, plus you’re a vegan.
“Is it a justifiable excuse to say: ‘Oh well, the sanctions prevented me from making the payments, so it’s not my fault’?” Malik said.
“The broader issue is that the sanctions were themselves a response to an action on the part of the sovereign entity,” he said, referring to the invasion of Ukraine. “And I think history will judge this in the latter light.”
It is more like the money is in the bank but the bank will not write the check. The money is not lost. Presumably Russia can point to the money and show it is there.
As a bond holder, from my view, it is the bank that is keeping me from getting paid. The banks can say they have a good reason because Russia is behaving really badly (and their government made them) but still…as a bondholder I am being punished for Russia’s bad behavior.
I can see being upset at both of them as a bondholder.
(FTR: I do not personally own any Russian debt unless it is buried somewhere in my retirement funds but I doubt they have any either.)
It’s not a matter of fault, though. It’s a matter of consequences. Even if you blame the bank, the takeaway is still that if you loan Russia money, the bank is likely to prevent you from getting paid. In other words, it’s risky to loan Russia money, and so you should either not do that, or negotiate for other more favorable terms (like a high interest rate) to make up for that increase in risk.
As a bond holder, you don’t really care about the reason why you’re not getting paid.
If it’s temporary, you let it slide - like the genuine “check was lost in the mail” scenario where if you make a “lost in transit” mortgage payment within 14 days, the bank typically will let this slide… Unless you start to make a pattern of this.
A long, indefinite thing where “well, here’s the thing, I do HAVE the money, BUT…” will affect your trust in future payment streams from this debtor.
Especially when it’s known by all that the mechanism of this inabilty to deliver payment is because of a conscious choice that Russia made. They were warned that these types of sanctions would be incurred if they didn’t pull back immediately, and they pressed on. That means they explicitly chose to allow these payment defaults to happen, as part of the price of their “exercise of sovereignty”.
It’s a bit like saying all your checks aren’t getting sent out because there’s happens to be a vicious dog attacking every mailman who comes by. But it’s a dog you chose to leave outside, while claiming you have the right to have whatever pet you want, and it can do whatever you let it do on your property. “But my bank balance has enough, don’t you worry!”
Again, this wouldn’t be as big of a problem if these bonds weren’t issued as denominated in “Western” currencies like Euros and US dollars. Why was that necessary to attract investors in the first place? It’d be more like the US paying Cuba the lease money for the base at Guantanamo Bay, and Castro refusing to accept it in protest. But the rent WAS paid as specified, per the existing terms.
Yes. The “official” Russian exchange rate for their ruble is much higher than in reality. To stretch a point it would be like trying to pay off your USD$ debt with Liberian dollars, one for one. =0.0065 United States Dollar.
Although truth be told, the fact that Russia is a world-wide pariah who is subject to multiple severe sanctions on them and those doing business with them, is in and of itself probably sufficient disincentive to loan them money regardless of whether they made managed to make this particular payment.
It seems akin to a criminal who has had his assets frozen by the IRS. If he owes money, and he can’t get the IRS to unfreeze a portion of the assets, then he will default on that debt. That seems like a real default to me.
Russia is a criminal pariah state and the world has frozen its foreign currency assets. Russia can fix this whenever they want.
If you loan money to a criminal, and all of that criminal’s money gets seized when the criminal is arrested, you’re not getting paid back because of their bad behavior. You can blame the government for seizing money you were due to be paid, but it’s ultimately the criminal’s fault, and you as a person who loans money need to be aware of your client’s activities.
To the extent that it matters: Yes, they defaulted. And banks now know that major world powers are willing to let them lose money on loans to criminal regimes.
The real question is whether CDSes on Russian debt have paid out yet. I’m not seeing anything indicating that they have, but they seem to be priced as if default is 100% certain.