An influential panel of derivatives dealers and investors ruled that a Russia’s failure to include extra interest when it made a late repayment of one of its bonds last month will trigger an insurance payout of billions of dollars, pushing Moscow one step closer to a historic debt default.
The Credit Derivatives Determinations Committee ruled that a “failure to pay” event has occurred, after Moscow belatedly repaid investors in early May but did not include $1.9mn of interest accrued during the 30-day period.
The ruling will trigger a payout on $2.5bn of insurance-like contracts investors use to protect themselves from a debt default, according to the panel. Wednesday’s decision means holders of Russian credit default swaps will receive a payout, but the size will be determined by an auction process of Russian bonds.
Western sanctions imposed upon Russia following its invasion of Ukraine choked off the country’s ability to make payments to US and European investors.
The small size of the accrued interest payment, along with the fact that Russia repaid the principal of the bond due in April, means the decision will not trigger a wider default. However, most investors think an official default is now a matter of time after US authorities last week prohibited American investors from receiving Russian bond payments.
“It looks like we have a default, at least for the purposes of CDS,” said Marcelo Assalin, head of emerging market debt at William Blair. “A broader default on Russia’s bonds is still an open question, but it seems likely that will be confirmed with upcoming interest payments.”