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2 min read . Updated: 21 Apr 2022, 05:56 PM IST An industry body overseeing the credit-default swaps market says Russia has failed to meet its contractual obligations to foreign creditors
Russia is inching closer to a default on its sovereign debts after an industry body overseeing the credit-default swaps market ruled Wednesday that the Kremlin failed to meet its obligations to foreign creditors when it paid them with rubles earlier this month.
Russia paid bondholders in rubles on April 6 after the U.S. blocked Russia from using American banks to channel payments on its dollar-denominated bonds. The Russian Ministry of Finance said it had attempted to remit dollar interest payments due to bondholders through JPMorgan Chase & Co., but the bank declined to process some $649 million in payments because the US Treasury didn’t grant approval.
The 14 counterparties that oversee the credit-default swaps market, including investment banks, asset managers and brokerage firms, ruled unanimously on Wednesday that the borrower fell short of fulfilling its debt obligations, as investors didn’t receive dollars that were owed.
Following the decision, credit-default swaps tied to the Kremlin’s creditworthiness can be triggered if Russia fails to make dollar payments before a grace period expires on May 4. It would be Russia’s first default on foreign debts since 1918.
Credit-default swaps are derivatives contracts that ensure investors receive near full compensation in case an underlying bond defaults. There is approximately $4.5 billion of credit-default swaps tied specifically to the Russian government, and an additional $1.5 billion located inside derivative indexes, according to JPMorgan Chase.
Russia, for its part, has continued to deny that it is close to default on its sovereign debts, since it made payments in rubles to special accounts inside Russia that creditors can access, with some restrictions.
Nonetheless, analysts said that for the two dollar-denominated bonds in question, payments in any other currency than the greenback would constitute a breach of contract.
“The bond contracts have no provision for repayment in any other currency other than dollars," analysts at Moody’s Investors Service said in a report last week, and payments in rubles “may be considered a default" if not remedied by May 4.
The cost of credit-default swaps for protection against a Russian government default has skyrocketed after war broke out between Kyiv and Moscow and allied governments imposed sanctions on the Russian financial sector.
On Wednesday, the upfront cost of buying a five-year contract for a Russian credit-default swap was roughly 73% of the total value of the debt to be insured, implying a default probability of 93%, according to data from ICE Data Services Inc. This compares with a cost of around 40% around the beginning of March and 5% at the beginning of February.