Russia’s military aggression against Ukraine, which has become Europe’s largest ground war in generations, has impacted millions of people and triggered a large-scale humanitarian crisis as vulnerable Ukrainians take shelter or flee their homes. The intensification and spread of the conflict is deeply troubling and is having a devastating impact on those people caught in the crisis.

This article focuses on potential market and economic implications of the conflict.

In this Q&A, Robert Burgess answers questions around Russia’s upcoming debt payments falling due. He also discusses the risks and implications of a potential default both for Russia and the rest of emerging markets.

Why has there been controversy around Russia’s debt payments?

On the day that the first sovereign hard currency payments were due since the announcement (16 March), the Russian Finance Minister stated that they had sent the instruction for the payment to be made, but that the Ministry hadn’t received a confirmation, while news reports stated that bondholders had not received payment by close of business on 16 March. There is 30-day grace period on coupon payments and the payments were received in US dollars by the bondholders on 17 March, thus avoiding default.

Is Russia likely to default on its future bond payments?

That question comes down to whether Russia has the resources and ability to make the payments, given the current sanctions (ability to pay) and if they can, then whether Russia wants to make the payments (willingness to pay).

Russia currently has the technical capacity to service its debt, at least until 25 May 2022. While US sanctions prohibit transactions involving the Central Bank of Russia (CBR), the National Wealth Fund and the Ministry of Finance, bond payments are currently permitted until 25 May. Russia also has the resources to make the payments.

In terms of the willingness to pay, statements from Russian authorities have suggested that payments on hard currency bonds might be made in roubles, but then they have said also said that they would pay in US dollars.

The coupon payments due on 16 March have to be made in US dollars or a credit default event will be triggered, but there is less clarity around the next two bond coupons (Russia ’29 and Russia ’35) due on 21 and 28 March. These two bonds have a couple of features that make the criteria for an official default (as defined by the ISDA Determinations Committee), uncertain. Firstly, they allow for payment in roubles if “for reasons beyond its control” the Russian government is unable to make payments in US dollars. The circumstances under which this would apply are not clear.  Secondly, these bonds are held in Russia by the National Security Depository (NSD) via Euroclear, which means that foreign investors might not be able to access payments. If Russia makes the payments but investors can’t access the funds, this would likely  constitute a default.  

 

Risk factors you should consider before investing:

• This material is not intended to provide investment advice or be considered a personal recommendation.
• The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment.
• Past results are not a guide to future results.
• If the currency in which you invest strengthens against the currency in which the underlying investments of the fund are made, the value of your investment will decrease. Currency hedging seeks to limit this, but there is no guarantee that hedging will be totally successful.
• Depending on the strategy, risks may be associated with investing in fixed income, emerging markets and/or high-yield securities; emerging markets are volatile and may suffer from liquidity problems.