Some payments arrived on time. Others hit several days late. And an increasing number are getting stuck in a web of financial intermediaries that are struggling to comply with international sanctions against Russian President Vladimir Putin and his allies.
A month since its invasion of Ukraine, investors are starting to realise just how narrow the path is for Russia — and some of its biggest corporations — to avoid default.
“The longer this goes on the uglier it is likely to get,” said Lee Buchheit, a sovereign debt expert who advised Russia and dozens of other countries on debt restructurings.
“Putin has put the Russian Federation in a situation where it is a pariah diplomatically, economically and even socially in most of the world. Is he really going to lose a lot of sleep thinking that he has stained his external debt record? I don’t think so.”
The Russian government has so far managed to make coupon payments on three of its Eurobonds, including one due this week, although not without some delays.
In addition, on Friday Russia’s National Settlement Depository said operations with Clearstream, a clearing house, haven’t been going through after its account was blocked on March 24. That makes it unclear how the sovereign will get payments on certain bonds to foreign investors.
Yet for many Russian companies whose owners have been hit by sanctions, the picture is very different. Even borrowers that have showed every intention to pay are hitting roadblocks along the way.
Severstal, a steel and mining company majority owned by Russian billionaire Alexey Mordashov — who is sanctioned in the EU and the UK but not in the US — inched closer to a default after Citigroup blocked a coupon payment whose grace period expired on Wednesday.
A payment from Evraz, another steel and mining company in which billionaire Roman Abramovich has a stake, has reached the paying agent after being initially blocked by Société Générale. Abramovich is subject to similar sanctions as Mordashov.
Other companies including natural gas giant Gazprom and Russian Railways have payments due this month.
“The value destruction has been quite immense for investors,” said Anthony Kettle, an emerging-markets portfolio manager at BlueBay Asset Management.
Sanctions and varying interpretations of sanctions by the financial intermediaries along the payment chain have led bondholders to run daily checks with their backoffice and custodians to confirm whether funds have been received.
Citigroup is the paying agent for about four dozen bonds tied to Russian companies, according to data compiled by Bloomberg. While some — including Gazprom and Norilsk Nickel — have successfully made coupon payments in recent days, others have seen payments stall. In addition to Severstal, Citigroup last week blocked a $19.25m (about R280m) interest payment sent by EuroChem Group.
Still, some investors are beginning to spot pockets of value in Russian bonds as interest payments, for the most part, continue to be made, especially in nearer-term maturities.
Others see the potential for a domino effect.
“We don’t think investing in Russia makes any sense here at all,” said Robert Koenigsberger, chief investment officer at Gramercy Funds Management “The trading system is breaking down,” he said. “It is more likely than not that we will see a default in Russia.”
Bloomberg. More stories like this are available on bloomberg.com
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