The keys to Russian debt and the “selective default” rating

Russia is approaching a general “default” after not being able to repay a debt in dollars this week, which led the S&P risk rating agency to declare on Saturday that the country is in a situation of “selective default”.

Here is what is known about Russian debt.

– How does the debt payment work? –

When a State or a company contracts a debt in foreign currencies or pays the interest, this sum is transferred by a national bank to a foreign one.

The latter must verify if it is possible to make the payment and then the sums are transferred to the creditors.

Why so cautious? In November 2018, the French bank Société Générale was fined 1.34 billion dollars by the US authorities for having evaded embargoes decreed by Washington.

In 2014, the BNP Paribas bank acknowledged violating US sanctions against Cuba, Iran and Sudan and paid $8.9 billion to avoid a US trial.

– What does a debt moratorium mean? –

A country is considered to be in moratorium on payments when it proves incapable of honoring its financial commitments to its creditors, which may be States, financial institutions (such as the IMF or the World Bank) or investors.

Non-payment is considered partial when a State only repays part of its obligations.

The government can declare itself in default and announce that it stops paying its creditors, as Russia did in 1998 with its domestic debt.

The announcement can also come from a rating agency when the grace period expires.

They can also be a private creditor or the US agency ISDA, which governs CDS insurance against non-payment, who declare the “default”.

– Is Russia on the brink of default? –

For several weeks, Russia ruled out the possibility of a moratorium, as the US Treasury allowed the use of foreign currency deposited by Moscow abroad to meet its payments.

In March, Russia repaid the interest, showing its willingness to pay.

But the United States announced Monday that it has banned Russia from paying its debt with dollars deposited in the US system. Consequently, the JPMorgan bank, which served as an intermediary to make the payment, blocked the transaction.

Then, the Russian Ministry of Finance announced on Wednesday that it paid the equivalent of 650 million dollars in rubles due on April 4.

This prompted the financial rating agency S&P Global Ratings to cut Russia’s foreign currency note to “selective default” on Saturday.

This qualification is the step before the lowest rank which is the “D” which implies a general moratorium.

This means that S&P believes that Russia can still pay future installments on time.

“The Russian state, like numerous Russian companies, was pushed into a technical default, an unprecedented event,” Slim Souissi, a specialist in banking and sovereign debt defaults, told AFP.

“The reimbursement must be made under conditions that are equally favorable to what was originally agreed”, then, to the extent that the reimbursement was in rubles, when the contract stipulated that it be in dollars, this can be considered as a default, Indian.

– Who serves as referee? –

The other major risk rating agencies Fitch and Moody’s stopped analyzing Russian debt and that of Russian companies within the framework of the sanctions decreed against Moscow.

The S&P Global Ratings agency, which planned to stop issuing ratings for Russia after April 15, gave its latest opinion this Saturday.

– Are there possible legal actions? –

“Theoretically,” creditors can “attempt to take legal action against the Russian state to receive their payments,” Souissi insisted.

Russia can also challenge the “default” and take it to court by claiming that it could not pay for the sanctions against it.

Source: Elcomercio

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