After the United States decided not to allow Russia to repay its debt with dollars held in American banks, Moscow announced that it had settled in rubles a debt in dollars, which increases the risk that the country will be declared in default. of payment. Unraveling a complex inter-institutional mechanism.
How does the refund work?
When a State or a company repays a loan denominated in foreign currencies or pays interest linked to such a loan, the sum is transferred to an account opened by a national bank in a correspondent bank abroad.
The latter must check whether or not it is possible to proceed with the payment.
After this compliance analysis, it deposits the money in a sub-account which will be controlled by a paying agent bank before the sums are paid out to bondholders.
Why such caution? Société Générale, a French bank, was fined US$1.34 billion in November 2018 by US authorities for circumventing embargoes imposed by Washington. Before her, BNP Paribas had admitted in 2014 to having violated American embargoes against Cuba, Iran and Sudan, and had paid 8.9 billion American dollars to escape prosecution in the United States.
What does mean a State’s default in payment?
A country is deemed to be in default of payment when it is unable to honor its financial commitments to its creditors, which may be States, financial institutions (International Monetary Fund, World Bank, etc.) or investors on the financial markets . The default is qualified as partial when the State does not reimburse part of its obligations.
The government itself can declare default by announcing that it is ceasing to repay its debt maturities, as Russia did in 1998. The announcement can also come from a rating agency after a grace period.
The default can still be formalized by a private creditor publicly revealing that a country has stopped reimbursing it, or even by the American agency ISDA (International Swaps and Derivatives Association), which governs CDS, a kind of insurance against default of payment.
Is Russia on the brink of default?
For several weeks, Russia has averted the danger of a default, the US Treasury having allowed the use of foreign currency held by Moscow abroad to settle foreign debts. In March, Russia thus paid several tranches of interest, showing its willingness and ability to repay.
But, as of Monday, the US Treasury Department no longer allows Russia to repay its debt with US dollars held in US banks. Thus, JP Morgan, which served as correspondent bank, blocked a payment.
As a result, the Russian Finance Ministry announced on Wednesday that it had settled in rubles almost 650 million US dollars due on April 4.
“The Russian state, like many Russian companies, is being pushed into a technical default, an unprecedented event,” Slim Souissi, a specialist in banks and state failures and deputy director of the Professional University Institute, told AFP. of Caen.
“The reimbursement must be made under conditions which are at least as favorable as what was initially agreed. However, “to the extent that the repayment is in rubles, while the bond contract stipulated a repayment in US dollars only, this can be considered as a default,” he explains.
The actual repayment of the debt occurs when the investor gets his money. For the time being, the situation is not clear and a payment default could be formally noted after a grace period of 30 days from April 4.
Who serves as arbitrator?
The rating agencies Fitch and Moody’s have abandoned the evaluation of the debt of the State and Russian companies, within the framework of the sanctions decided against Russia. The S&P Global Ratings agency must do the same “before mid-April”. It is not certain that it pronounces a payment default from Russia by this date.
Are prosecutions possible?
“Theoretically”, creditors can “take legal action against the Russian state to get reimbursed”, according to Mr. Souissi. Even if the room for maneuver seems quite limited.
Russia could also challenge the default in court on the grounds that it was prevented from honoring its foreign debt by the financial sanctions taken against it.