Financial analysis firm S&P Global has placed Russia in the “selective default” category after the country paid off $650 million in ruble debt last week.
According to S&P, this is the first time that Russia will be unable to pay its foreign debt in foreign currency, and investors are also expected to be unable to exchange rubles for dollars. Although Russia has a 30-day grace period to make changes to transaction money, the Russian government is not expected to make these conversions.
How does debt settlement work?
When a government or company incurs a foreign currency debt or pays the interest, that amount is transferred from a national bank to a foreign one.
He has to check whether the payment is possible, and then the amounts are transferred to the creditors.
Why so careful? In November 2018, French bank Société Générale was fined $1.34 billion by US authorities for circumventing embargoes imposed by Washington.
In 2014, bank BNP Paribas admitted to violating US sanctions on Cuba, Iran and Sudan and paid $8.9 billion to avoid a US trial.
What does debt moratorium mean?
A country is considered to be in a moratorium on payments when it proves unable to meet its financial obligations to its creditors, who may be sovereigns, financial institutions (such as the IMF or World Bank), or investors.
A non-payment is considered partial if a state repays only part of its obligations.
The government can default itself and announce that it will stop making payments to its creditorsas Russia did with its domestic debt in 1998.
The announcement can also come from a rating agency after the grace period has expired.
They may also be a private creditor or the US agency ISDA, which regulates CDS insurance against default, who declare the “default”.
Is Russia on the verge of default?
For several weeks, Russia ruled out the possibility of a moratorium as the US Treasury Department allowed the use of foreign currency deposited by Moscow abroad to settle its payments.
In March, Russia paid back the interest, thereby demonstrating its willingness to pay. But the United States announced Monday that it has banned Russia from paying its debts with dollars deposited in the US system. As a result, bank JPMorgan, acting as an intermediary for the payment, blocked the transaction.
Then the Russian Treasury announced on Wednesday that it had paid the equivalent in rubles of $650 million, which was paid on March 4.
This prompted financial ratings agency S&P Global Ratings to cut Russia’s foreign currency note to selective default on Saturday. This qualification is the level before the lowest rank, the “D”, implying a general moratorium.
This means that S&P assumes that Russia can still pay future installments on time. “The Russian state, like many Russian companies, was pushed into a technical default, an unprecedented event,” Slim Souissi, a specialist in bank and sovereign debt defaults, told AFP.
“The refund must be made on terms as favorable as those originally agreed,” then to the extent that the refund was made in rubles, if the contract stipulated that it should be made in dollars, that may be considered default, Indian .
Who acts as referee?
The other major risk rating agencies Fitch and Moody’s have stopped analyzing Russian debt and Russian companies under the sanctions imposed on Moscow.
S&P Global Ratings agency, which plans to stop rating Russia after April 15, issued its latest statement this Saturday.
Are there possible legal steps?
“In theory” creditors could “try to take legal action against the Russian state in order to receive their payments,” Souissi emphasized.
Russia can also challenge the default and take it to court, claiming it cannot pay the sanctions.
*With information from AFP.