Ireland-listed Russian debt of $23bn in focus as default warnings grow louder

March 2 was not a great day for Igor Sechin, head of Moscow-controlled oil and gas giant Rosneft, who is documented by the EU as one of Vladimir Putin’s closest confidants and known closer to home. him as “Darth Vader”.

That night, French authorities seized Sechin’s superyacht Amore Vero, estimated at $120 million (€109 million), as it attempted to leave a port near Marseille, in breach of sanctions that the EU had imposed on a host of oligarchs a week earlier. about Russia’s invasion of Ukraine.

Holders of $2 billion of Rosneft bonds – issued through an Irish special purpose financing vehicle (SPV) popular with Russian companies over the past decade – have faced a tough few days in the beginning of the week, the state corporation having failed to repay. before the debt maturity last Sunday. Fortunately, they got their money back on Wednesday, in dollars.

Concerns

But they had good reason to be nervous. Concerns surrounding the bond settlement had become exaggerated when Putin issued a decree last weekend allowing payment in rubles to bondholders from “hostile” nations, while Russian state institutions, businesses and individuals close to the Kremlin were hit by waves from the west. sanctions in recent weeks.

A redemption in a currency other than the currency in which the bonds were issued – in dollars, in this case – would have been considered equivalent to a default.

It is unclear how the payments circumvented Putin’s decree. It is assumed that the transfers – and those paid to bondholders of state-controlled energy giant Gazprom on Monday – had already been sanctioned before he said foreign bondholders were being paid in a foreign currency. free fall.

Meanwhile, Bloomberg reported on Friday that Russian Railways has yet to make a 25 million euro interest or coupon payment – due since Sunday – on bonds issued by its Irish SPV, known as the name of RZD Capital.

This can only add to growing market jitters over a default by the Russian Federation itself, which has about $40 billion of its borrowings denominated in dollars and euros.

More than $23 billion of them are technically listed on Euronext Dublin, the world’s leading bond listing venue, under Central Bank-approved prospectuses (the securities themselves are actually governed by English law).

Hubs

The bonds are not actually traded on the Irish Stock Exchange, but over-the-counter in securities brokerage centers such as London and Frankfurt. Yet Euronext Dublin and an ecosystem of professional services firms in the capital earn net fees through the line of bond listing work, as well as a sister business in fund listing.

As such, Dublin has played its part in facilitating the Putin government’s access to global debt markets over the years, despite events like the Russian invasion of Georgia in 2008; The annexation of Crimea in 2014 and the launch of a military campaign in Syria in 2015 that helped President Bashar al-Assad to devastating effect.

For example, global investors were not deterred from acquiring €1bn worth of Kremlin bonds in late November 2018 (which, again, ended up listing in Dublin) just days after Russia seized three Ukrainian ships in the Black Sea, fueling tensions between the two countries.

Bond market watchers reportedly said at the time that the bond deal was likely deliberately timed to antagonize the West and show that the Kremlin still had access to capital markets, despite international condemnation of the shares. Who is sure to know? But investors were certainly not put off. Until now, and not necessarily by choice.

International investment funds with significant exposure to Russia – including those domiciled in Ireland – have suffered large outflows and, in some cases, temporary suspensions, as Western allies have unleashed waves of sanctions against entities and Russian individuals following the war against Ukraine over the past two weeks.

The sanctions also affected most Russian securities exchanges.

Investors

Russian sovereign bonds listed in Ireland have also been suspended, removing their ability to be traded on exchanges and limiting investors’ ability to buy and sell them on the more common over-the-counter market.

The Institute of International Finance, the trade association for the global financial services industry, forecast on Thursday that Western sanctions – including cutting several Russian banks from the Swift international payments messaging system and freezing much of of Moscow’s $640 billion in foreign exchange reserves – have triggered a severe recession in Russia that will see its economy shrink by 15% this year.

That would amount to a collapse worse than the Great Recession of 2008-2009 and the Russian debt crisis of 1998 combined.

Fitch, the debt rating agency, came out this week to warn that a Russian default ‘is imminent’, as it cut its stance on the country nine levels deep in territory junk bonds. The International Monetary Fund followed up on Thursday, warning that the prospect of the country forgoing debt is no longer “an unlikely event”.

Assurance

Of course, the markets are already ahead. Trading in a form of insurance in financial markets – known as credit default swaps – against non-payment by Russia has soared in the past two weeks. The latest price of these instruments suggests a default of 70% within a year.

Some $65.6 million of a semi-annual coupon payment on $3 billion of Dublin-listed bonds is due March 21 (about a week after Russia faced $107 million in coupon payments). interest on other foreign bonds).

Meanwhile, around $102 million in interest is expected to be paid on a $4 billion Irish-listed bond at the end of the month. Russia has a grace period of 30 calendar days to make payments before going into default.

The earliest maturity date for a Dublin-listed bond is April 2025, by which time $1 billion of debt is expected to be fully repaid. Elsewhere, Russia faces a principal repayment of $359 million on March 31, followed by a larger $2 billion bond that matures on April 4.

Data

Although Ireland is the official home of Russia-linked financing SPVs holding €37 billion in assets and €11.4 billion in Russian stocks and bonds (out of a total of €4 trillion of state-domiciled international fund assets), according to end-2021 Central Bank data, direct domestic exposure is minimal. Insurance companies hold less than 100 million euros in Russian assets and households around 1 million euros.

But, of course, the conflict is wreaking havoc elsewhere in global financial markets, with oil and other commodity prices soaring, causing problems for the global economy and potentially depressing growth.

A Russian default would hit emerging markets first, analysts say. But that would surely reverberate much further afield.


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John A. Bogar