Russia’s Foreign Currency Rating Cut; Risk of Debt Default Looms

A view shows Russian ruble coins in a photo illustration taken on Oct. 26, 2018. Maxim Shemetov/Reuters

Russia’s foreign currency payment rating has been downgraded after Moscow used rubles to make a dollar-denominated debt payment last week, a move that ratings firm S&P Global said casts doubt on Russia’s ability or willingness to honor its obligations to foreign debtholders.

S&P Global on April 9 cut Russia’s rating to “selective default,” saying in a statement that it understood that Russia had made coupon and principal payments on dollar-denominated eurobonds on April 4.

“We currently don’t expect that investors will be able to convert those ruble payments into dollars equivalent to the originally due amounts, or that the government will convert those payments within a 30-day grace period,” the agency said.

The agency added that it believes that sanctions against Russia over its invasion of Ukraine will be tightened again shortly, a move that it said was likely to impede Moscow’s willingness or “technical abilities” to meet the terms and conditions of its commitments to foreign holders of its sovereign debt.

‘Unfriendly Actions’

Citing “unfriendly actions of the U.S. Treasury,” Russia’s Ministry of Finance said in an April 6 statement that a foreign correspondent bank had refused to process $649 million in payments on two Russian sovereign bonds, forcing Moscow to involve a Russian financial institution to make the payments in rubles.

With the move, Russia’s obligations on the two bonds “have been fulfilled in full,” the ministry insisted.

Russian Finance Minister Anton Siluanov told state news service Tass on April 8 that the rubles transferred in lieu of the dollars can be converted for creditors as soon as the West’s freeze on Russia’s foreign reserves is lifted.

“The logic is as follows: The rubles that we use to repay debts can be converted into a foreign currency on the condition that access to our currency reserves—the frozen reserves of the Russian Federation—is restored,” Siluanov told the outlet.

By carrying out the transaction in rubles rather than the contractually-stipulated dollars, Moscow has entered a 30-day grace period from the payment date, which was April 4.

Once the grace period runs out, Moscow will be considered to have defaulted on the debt, which would make it Russia’s first sovereign external default in over a century.

Trying to ‘Make Russia Declare Default’

Siluanov told Tass on April 7 that, “Western countries are trying in every possible way to make Russia declare default,” adding that Moscow would resort to “other mechanisms” to make the payments.

“We will endeavor that lenders receive their money due from the Russian Federation, but we will do so within the framework of other mechanisms,” he said, according to Tass.

Russian bonds have emerged as a flashpoint in its economic conflict with Western countries, which have imposed crippling sanctions on Moscow over its military actions in Ukraine.

In response to the sanctions, Russian President Vladimir Putin on March 5 signed a decree allowing the payment of foreign currency debts to “unfriendly” countries in rubles.

Even though around half of Russia’s foreign currency reserves held abroad have been frozen, analysts say Moscow has the means and ability to service its foreign-denominated debt, as it still has hundreds of millions that are not blocked and the country continues to receive payments for energy.

The U.S. Treasury has not banned correspondence banking with Russia and has granted a license to allow for payments relating to Moscow servicing sovereign debt until May 25, according to Reuters.

Elina Ribakova, deputy chief economist at the Institute of International Finance, told Reuters the situation is likely a “willingness-to-pay” scenario, with Russia trying to pay in frozen funds and, failing that, in rubles, rather than from fresh dollar or euro revenue streams or other holdings it has access to.