S&P Global has placed Russia under a “selective default” rating after the Russian government said last week that it had repaid about $650 million in dollar-denominated debt in rubles.
The ratings agency said late Friday that it didn’t expect investors to be able to convert the ruble payments into U.S. dollars that were equivalent to the original amount due, pushing Russia toward its first default on foreign currency sovereign debt in more than a century.
The bonds do have a 30-day grace period, giving the Russian government time to repay in dollars or find some other way to avoid a default. S&P Global said it didn’t expect the government to convert the payments within the grace period.
“Sanctions on Russia are likely to be further increased in the coming weeks, hampering Russia’s willingness and technical abilities to honor the terms and conditions of its obligations to foreign debt holders,” the ratings agency said.
On April 4, a dollar-denominated Russian government bond matured and another coupon payment came due. That same day, the U.S. Treasury Department tightened its restrictions on Russian transactions in an effort to force Russia to choose between draining the dollar reserves it has on hand or using new revenue to avoid defaulting on its debt. The department blocked Russia from using dollars held in American banks for its bond payments, and the transactions weren’t completed by JPMorgan. Subsequently, the Russian finance ministry said it paid the debt in rubles.
While the finance ministry said it considered its debt obligations to have been fulfilled “in full,” the rating agencies have said that payment in a currency different from the one that was agreed upon would be a default. Neither of the bonds with payments due on April 4 had a provision for payment in a currency other than dollars.
Sanctions, including freezing the central bank’s reserves held overseas, were imposed on Russia after its invasion of Ukraine in late February. The ratings agencies then cut Russian debt to junk status and investors bet on a default. But for weeks, Russia continued to make debt payments. U.S. authorities permitted the transactions and said American bondholders would be allowed to receive debt payments, despite the sanctions, until May 25.
If Russia doesn’t repay the debt in dollars, it’s unclear how the issue will be resolved. By the time the 30-day grace period on the April 4 bond payments expires, credit rating agencies will be barred by European Union sanctions from providing any ratings to Russian entities and won’t be able to make a judgment on whether a default has occurred. The companies are withdrawing all their ratings ahead of the E.U.’s April 15 deadline.
Last month, Russia’s finance minister, Anton Siluanov, accused the countries that have frozen Russia’s internationally held currency reserves of trying to create an “artificial default.” Last week, the finance ministry said if the reserves were unfrozen, then the ruble payments could be converted to dollars.
S&P Global also said on Friday that it held its “CC” junk debt rating for Russia’s sovereign debt in rubles (known as local currency debt) because it wasn’t sure if nonresident bondholders were able to access their coupon payments.
According to documents on the Russian finance ministry’s website, coupon payments for local currency bonds were being paid. But in March, Russia blocked interest payments to nonresidents.
“Definitive information on the payment process is currently not available to us,” the agency said.