On Wednesday June 1, Russia failed to pay $1.9 million in interest on its debt as a result of recent US sanctions. The country is approaching default. This "failure to pay" has been acknowledged by a committee of creditors, and will give rise to compensation for investors.
Payment blocked by recent US sanctions
At the beginning of April, the United States further tightened its sanctions against Russia. Dollar payments on Russian debt from accounts held by the Moscow government in US banks have not been accepted for several weeks, and since last week Russia has not been allowed to settle any dollar debts. As a result, Russia was unable to make the $1.9 million interest payment on its debt due on May 26.
As Eric Dor, Director of Economic Studies at the IESEG School of Management, explains, Russia " paid the amounts it had to pay on the agreed due date ". On the other hand, interest on arrears has not been added, " intentionally or otherwise ", to these amounts.
This interest is linked to a bond repayment to which Russia had complied after a one-month "grace period". It had then paid only part of the interest, as well as the principal of its debt.
Failure to pay and compensation
A creditors' committee, made up of bankers and traders, met under the aegis of ISDA, the International Swaps and Derivatives Association, which brings together the various players in the global derivatives markets.
The committee has declared Russia to be in "payment default", which entitles certain investors to compensation. Indeed, investors who have purchased Credit Default Swaps (CDS), derivative products similar to insurance policies, have the right to be reimbursed in full for their claims if a debtor defaults.
Compensation is expected to total at least $3.2 billion. This sum is to be paid to investors by the financial institutions that sold them the Credit Default Swaps on Russian debt.
These financial institutions include PIMCO (Pacific Investment Management Company), a Californian bond fund. According to Bloomberg, PIMCO's exposure to Russian debt via Credit Default Swaps amounts to $1 billion.
If the 3 major rating agencies - S&P Global Ratings, Moody's and Fitch - were to officially declare Russia in default, the country would find itself even further removed from the global financial system.