Russia Avoided Default, But For How Long ?

Russia’s decision to invade Ukraine created various challenges at home and abroad. In spite of challenges, the country is able to stay afloat. The country may have averted default as the country’s finance ministry announced that it made several overdue payments in dollars on its overseas bonds, shifting the market’s focus to upcoming investments and whether it would avoid a historic default.

The country’s $40 billion in international bonds and the chance of default became the focus of global financial markets. After Russia attacked Ukraine, many governments imposed sanctions on the country. 

The war in Ukraine turned Russia into a pariah, including in financial markets. Its decision to attack Ukraine also had a negative impact on Russia’s ability to pay its debts. As a reminder, the chance of default significantly increased in early April. At that time, the U.S. stopped the Russia from using frozen reserves to pay some $650 million to its bondholders.  

Russia and its creditors 

With the end of a grace period on those payments looming, the country’s finance ministry said on Friday it paid $564.8 million of coupon and redemption on a bond maturing in 2022 as well as a coupon payment of $84.4 million on another due in 2042.

Russia’s finance ministry’s announcement surprised markets. It announced it paid nearly $650 million it owed holders of two of its dollar bonds. The Credit Derivatives Determinations Committee met on Friday. The committee acknowledged Russia’s payments, but nevertheless made plans for a credit default swap auction next week. However, the committee made plans for an auction “solely in order to prepare for the possibility of a Failure to Pay Credit Event”. 

Russian bond prices rose according to traders, in certain cases by 15 cents, nearly doubling in price. 

Before the war in Ukraine roughly $20 billion, or half the outstanding foreign currency issuance, was held by investment funds and money managers outside Russia.