Russian oligarchs finding it tough making payments to foreign creditors

Several prominent businessmen's assets targeted due to links with Kremlin

By Web Desk

Published: Wed 23 Mar 2022, 12:23 AM

Last updated: Wed 23 Mar 2022, 1:54 AM

Russian companies owned by sanctioned oligarchs are having a tough time paying back creditors. A number of them are likely to default even though they have ample funds to make payments.

The EU has sanctioned 15 oligarchs in the wake of the Ukraine attacks. The EU’s reason: The oligarchs had close ties with Russian President Vladimir Putin, a CNN report said.

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London-listed steelmaker Evraz, which is partly-owned by Roman Abramovich, has been stopped from making payments on one of its bonds due to UK sanctions against the oligarch. The company says they may be pushed into a technical default on its debt.

According to a Business Insider report, the firm has issued a statment said saying that it had made a $19 million payment on a $700 million bond that matures next year.

Abramovich, valued by Forbes at $13.7billion, had his assets targeted due to his links with Kremlin. Meanwhile, France too has stepped in to enforce sanctions and has detained a $120million yacht owned by Igor Sechin, a close confidant of the Russian president.

One of Russia’s richest men Alexei Mordashov, chairman and main shareholder of the steel conglomerate Severstal PAO is also facing payment issues. His company had a payment due on March 16 and the grace period expires on Wednesday.

The company could perhaps announce that it will be in default early Wednesday, a source was quoted as saying in the report.

Outstanding debts

Russian companies have about $98 billion in outstanding debts and have to clear around $17 billion of payments this year, according to JPMorgan Chase & Co.

Investors had been preparing for defaults from Russia companies ever since the sanctions came into effect. But some top companies like Gazprom and Rosneft have, however, managed to make payments to western investors.

Paying external holders means Russia swerved its first default, for now, since a 1998 financial crisis and its first on international bonds since the 1917 revolution.

So far, Russia has managed to avoid a sovereign default. But with another $66 million due for payment on Monday and a total of $4.7 billion between now and year end, things will only get tougher.

As of now, Russia has 15 international bonds outstanding with a face value of around $40 billion. Like many international bonds there will be a 30-day grace period, meaning Moscow has until April 15 to make the payments.

Bond payment

On Monday, Russia is due to make a $66 million payment although technically, under the terms of the issue it could make this payment - as well as a $102 million one on March 28 - in alternatives currencies, including roubles.

Gramercy, an emerging markets fund manager, noted on Friday that making use of the bond's "alternative payment currency event" required a 15-day notice, which it said Russia's finance ministry had not published.

After last week's payment showed Russia had the ability and willingness to pay in dollars, Morgan Stanley analysts said there was no reason for Russia to be able to invoke the alternative rouble payment clause, but that "doesn't guarantee that Russia won't try".

On March 31, there is a $447 million payment that must be made in dollars, while its biggest payment of the year - and its first full repayment of "principal", of $2 billion -- is due on April 4.

Foreign investors also owned about $38 billion-worth of rouble-denominated sovereign bonds known as OFZs before this crisis, JPMorgan estimates - nearly 20% of that market. Some of the payments due on those have not yet been made.

Even if Russia remains willing to pay, there may be complications, especially for bonds that must be serviced in dollars.

Transactions banned

Western sanctions ban transactions with Russia’s finance ministry, central bank or national wealth fund, although the temporary general license 9A issued by OFAC on March 2 makes an exception for the purposes of “the receipt of interest, dividend, or maturity payments in connection with debt or equity”.

That license expires on May 25, however, after which Russia will still have almost $2 billion worth of external sovereign bond payments to make before the end of the year.

Morgan Stanley analysts say that after Monday’s test, the next crucial date is May 27, when the first payments come due after the licence has expired.

That could force Russia into making payments for a dollar 2026 bond and a euro 2036 bond in roubles to onshore accounts, which the finance ministry has said would be its fallback option.

That would trigger a default on the dollar bond, as only the euro bond allows for payment in roubles.

Morgan Stanley analysts say that the GL9A licence could be extended, “yet for this to happen it would need a significant move towards de-escalation”.

Frozen wealth

Some analysts suggest money frozen abroad under the sanctions may have been used for last week’s payments, although Russia has generally paid debt out of budget funds in the past.

If Russia fails to make any of its bond payments within their defined grace periods, or pays in roubles where dollars or euros are specified, it will be a historic default.

Such an event would have been unthinkable before the Feb. 24 attack on Ukraine, which Moscow describes as a “special military operation”, and subsequent Western sanctions.

Russia has nearly $650 billion of central bank reserves, one of the lowest debt-to-GDP levels in the world and has been raking in money from soaring oil and gas prices.

A default would lock it out of the international borrowing markets until the sanctions were lifted and it repaid creditors for any losses they had suffered.

It would also depress its credit ratings for some time, pushing up the interest rates the government and big Russian companies can borrow at.

– With inputs from Reuters