Standard & Poor’s Global has placed Russia under a “selective default” rating after the Russian government said last week that it had paid off about $650 million in ruble-denominated debt.
The rating agency said late Friday that it did not expect investors to be able to convert the ruble payments into US dollars that were equal to the original amount owed, pushing Russia toward its first foreign-currency sovereign debt default in more than a century.
The bonds have a grace period of 30 days, which gives the Russian government time to repay in dollars or find another way to avoid default. S&P Global said it does not expect the government to transfer payments during the grace period.
“Sanctions on Russia are likely to increase in the coming weeks, hampering Russia’s willingness and technical capabilities to respect the terms and conditions of its obligations to external debt holders,” the rating agency said.
On April 4, Russia’s dollar-denominated government bonds matured and another coupon payment came due. On the same day, the US Treasury tightened its restrictions on Russian transactions in an attempt to force Russia to choose between depleting its existing dollar reserves or using new revenue to avoid defaulting on its debt. The ministry prevented Russia from using dollars held in US banks to pay off its bonds, and JPMorgan did not complete transactions. After that, the Russian Ministry of Finance said that it paid the debt in rubles.
While the Finance Ministry said it considers its debt obligations to be met “in full,” the rating agencies said paying in a different currency than the one agreed upon would be tantamount to default. None of the bonds with payments due on April 4 had a provision for payment in a currency other than the dollar.
Sanctions, including a freeze on central bank reserves held abroad, were imposed on Russia after its invasion of Ukraine in late February. Then rating agencies downgraded Russia’s debt to junk and investors bet on a default. But for weeks, Russia kept making debt payments. US authorities authorized the deals and said US bondholders will be allowed to receive debt payments, despite the sanctions, until May 25.
If Russia does not repay the debt in dollars, it is not clear how the problem will be resolved. By the time the 30-day grace period in bond payments expires on April 4, credit rating agencies under EU sanctions will be barred from providing any ratings for Russian entities and will not be able to pass judgment on whether a default has occurred. The companies withdraw all their ratings before the EU deadline of April 15.
Last month, Russia’s Finance Minister, Anton Siluanov, accused countries that froze Russia’s internationally held foreign exchange reserves of trying to create an “artificial default.” The Finance Ministry said last week that if the reserve freeze was lifted, the ruble payments could be converted into dollars.
Standard & Poor’s Global also said on Friday it was maintaining its “CC” junk rating of Russia’s sovereign debt in rubles (known as debt in the local currency) because it was not sure whether non-resident bondholders would be able to access their coupon payments.
According to the documents published on the website of the Ministry of Finance of Russia, coupon payments for bonds were made in local currency. But in March, Russia blocked interest payments to non-residents.
“The final information on the payment is not currently available to us,” the agency said.