HNewsWire- More than two decades ago, on August 17, 1998, Russia defaulted on its debt and devalued the ruble, precipitating a political crisis that culminated in the election of Vladimir Putin to succeed Boris Yeltsin and also resulted in the spectacular implosion of a then-obscure hedge fund called Long Term Capital Management (staffed to the gills with "brilliant" Nobel laureates), which, following a Fed-led Wall Street bailout, ushered in the
We bring this up because Russia will enter another technical default in just a few hours.
In the midst of a flurry of financial restrictions implemented by Moscow today, the Russian central bank suspended coupon payments to foreign holders of ruble bonds known as OFZs, a move it described as a temporary measure to bolster markets in the aftermath of international sanctions. What it is, in fact, is a technical default on forthcoming interest and maturity payments, with a trigger due as early as tomorrow.
The Bank of Russia issued the directive to depositories and registries as part of a slew of measures announced earlier this week, including a ban on foreigners selling domestic securities. It may prevent foreign investors who owned about 3 trillion rubles ($29 billion) in debt at the start of February from collecting interest on their assets, which are already restricted from sale.
"Issuers have the authority to decide on dividend payments and other securities payments and to transmit them to the accounting system," the central bank stated in an emailed response to inquiries. "However, depositories and registrars will not make payments to international customers. This also holds true for OFZ."
The central bank made the decision to "prevent widespread sales of Russian assets, fund withdrawal from the Russian financial market, and to promote financial stability," according to the statement.
With up to half of Russia's foreign assets locked overseas as a result of sanctions aimed at punishing the Kremlin for invading Ukraine, the Bank of Russia said Monday that it will tighten capital controls by prohibiting currency transfers outside. While it first said that the action was not intended to halt debt payment, several investors and economists expressed concern that the decree's wording may amount to a default.
"Is the game over? I believe they miscalculated the extent to which sanctions would go and now have nothing left to do "Bloomberg quoted Viktor Szabo, a fund manager at Aberdeen Asset Management in London. "All of Russia's markets have imploded."
"This is almost certainly a technical default; we'll have to wait and see how long it lasts," said Nick Eisinger, co-head of developing markets active fixed income at Vanguard Asset Management in London. "We also see a high probability of technical default on sovereign Euro-bonds."
The central bank did not define the duration of the prohibition. According to Interfax news agency, the interim ban would remain in force for six months unless the regulator removes it ahead of schedule. The ruling demonstrated how fast Russia's free-market credentials have deteriorated in the aftermath of the Ukraine incursion.
However, it will be irrelevant: a single embargo day would be sufficient to force Russia into a technical default – the next coupon payment on OFZ bonds is due Wednesday for notes expiring in 2024, according to Bloomberg.
The announcement came soon after we learnt that the world's two largest settlement systems, Euro-clear and Clear steam, would no longer handle Russian assets, thereby reversing the much-heralded nine-year-old openness of the domestic debt market to foreign investors.
Russian government debt fell this week, resulting in a 240 basis point increase in the yield on the 10-year benchmark to 12.28 percent. The ruble's more than 20% decline so far this year is the biggest in history, according to Bloomberg data.
"A possible reduction in the Russian government's readiness to pay its debt on time and in full increases the likelihood of more negative credit outcomes for international holders of Russian debt instruments," Moody's Investors Service said in a statement.
And while Russia is on the verge of re-defaulting - something it has certainly experienced before - with its economy devastated but rich in natural resources, the question is how the US will deal with the harsh, new reality in which oil is now virtually certain to reach $150, if not $200, at a time when the US' primary output is hyper financialization, with financial assets valued at roughly 6.3x GDP at the last check.
Please review "Shades Of 2008 As Oil Decouples From Everything" for the solution.
Putin:1) BP decided to take a hit of as much as $25 billion, just to leave Russia immediately
3) Russians lined up at cash machines around the country to withdraw foreign currency
4) Unless there's a surprise de-escalation, Monday may turn out to be a dramatic day for the ruble, Russian stocks, and European markets
5) The European Union closed its airspace to Russia. The blockade applies to any plane owned, chartered or otherwise controlled by a Russian person. Unprecedented
6) The decision to exclude Russian banks from the SWIFT messaging system could result in missed payments and giant overdrafts within the international banking system
7) The EU is going after oligarchs. Essentially now the entire political and economic elite of the country is sanctioned
8) The U.S. Embassy in Russia said citizens in the country should consider departing *immediately* - The EU approved $500 million in lethal military aid to be used against Russia's invading forces in 🇺🇦 and banned 🇷🇺 state media - also unprecedented
9) The EU also banned all transactions with the Russian central bank, severely curbing its ability to use foreign currency reserves to cushion the devastating blow from the sanctions
10) The situation on the front is unclear, but it seems Ukrainian facilities containing nuclear waste suffered damage
11) Putin says he put his nuclear forces on "high alert". Unclear what this means and what are his intentions. On the tactical side, things are definitely not going as well as he had hoped
12) Could planned talks lead to some sort of resolution? Unclear what could a mutually acceptable solution be
13) Meanwhile, Chancellor Olaf Scholz announced plans for a massive boost in defense spending in the latest historic policy shift in Germany triggered by Russia’s invasion of Ukraine.
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