An auction will be held on insurance against Russian debt default

Russia last defaulted on its foreign debt in 1918, when the leader of the Bolshevik Revolution Vladimir Lenin refused to acknowledge the massive debts of the deposed tsar’s regime.

Alexander NEMENOV

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An auction to pay insurance on Russia’s unpaid debt was due to take place on Monday, an event officially marking the first foreign default from the sanctioned country in more than a century.

Moscow was unable to transfer funds to creditors in June due to Western sanctions following its invasion of Ukraine.

The non-payment of its debt triggered a complicated process to compensate investors who bought credit default swaps (CDS), a kind of insurance that bondholders buy to protect against borrower default.

But the auction was repeatedly delayed as organizers had to ensure sanctions would not block CDS payments.

The country last defaulted on its foreign debt in 1918, when the leader of the Bolshevik Revolution Vladimir Lenin refused to acknowledge the massive debts of the deposed tsar’s regime.

Russia defaulted on its domestic debt in 1998 when, due to a fall in commodity prices, it faced a financial crisis that prevented it from supporting the ruble and repaying debts accumulated during the first war in Chechnya.

The latest default follows a series of unprecedented Western sanctions that have isolated Russia from the global financial system, including a freeze on Moscow’s $300 billion in foreign exchange reserves held abroad.

Russia lost the last way to repay its foreign currency loans after the United States in May removed an exemption that had allowed American investors to receive payments from Moscow.

Russian officials have always insisted they have the funds to service the country’s debt, calling the situation a “farce” and accusing the West of pushing for an “artificial” default.

Moscow’s foreign currency debt is relatively low, at around $40 billion.

But sanctions prevented it from paying bondholders in June.

International rating agencies, the institutions that decide whether a country is in default, have been unable to officially declare whether Russia is in default due to sanctions barring them from covering Moscow’s debt.

But ratings agency Moody’s issued a less formal “issuer comment” saying missed payments on interest totaling $100 million constituted default.

The official decision was therefore left in the hands of a little-known panel of investors, the Credit Derivatives Determinations Committee (CDDC), which organizes the CDS auctions.

In late June, the London-based CDDC – made up of 15 leading banks and financial firms – declared Russia’s missed payment a “credit event”.

CDS auctions usually take place about 30 days after the committee declares a credit event, but doubts about whether sanctions allowed the process to take place caused the three-month delay.

Foreign investors are no longer able to trade Russian bonds, and auctions are essentially transactions involving these assets.

But the US Treasury Department issued a waiver in July to allow the auction of eight Russian bonds to take place this month.

JPMorgan, the investment firm, says CDS against the Russian default are worth nearly $2.4 billion.

The auction takes place in two stages. The first stage will set an initial price on the eight bonds, which will serve as the basis for setting the final compensation price in a second stage open more widely to investors.

The CDDC said auction settlement dates may be slightly delayed due to a public holiday for Queen Elizabeth II’s funeral on September 19.


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John A. Bogar