Russia repeats the nightmare of the 1998 financial crisis? Russian debt defaults in hours

Russia fell into default on August 17, 1998, and the ruble was heavily depreciated, which led to the Russian financial crisis. Finally, Vladimir Putin took the opportunity to replace Boris Yeltsin as president. It also led to the implosion of the bankruptcy of the hedge fund Long-Term Capital Management L.P. (LTCM) at the time. Today, history could repeat itself as Russia faces a technical default within hours.

Zero Hedge reported on the 1st that the Bank of Russia has issued instructions to bond custodians and registrars to temporarily prohibit interest payments on ruble-denominated Russian government bonds (known as “OFZs”) held by non-domestic residents in order to Prop up financial markets battered by Western sanctions.

That is to say, foreign investors who held nearly 3 trillion rubles (about 29 billion US dollars) of OFZ in early February are now not only unable to receive interest, but also unable to sell these bonds because of a ban by the Moscow government. According to Bloomberg statistics, the next interest payment date for OFZ bonds due in 2024 is March 2.

“Is it game over? (Game over?) I think they underestimated how severe the sanctions would be, and there’s nothing they can do now … all the Russian markets are falling apart,” said Viktor Szabo, a fund manager at Aberdeen Asset Management.

Nick Eisinger, co-head of emerging markets fixed income at Vanguard Asset Management, said it was likely to be a technical default and it would be interesting to see how long it would last. In addition, sovereign-grade international bonds (Eurobond) also have a strong possibility of technical default.

“The issuer has the right to decide whether to pay interest and transfer the money to the account. However, bond custodians and registration agencies are not allowed to make payments to foreign customers, and this rule also applies to OFZ,” the central bank said in an emailed response. It was pointed out that this was to avoid a massive sell-off of Russian securities and the withdrawal of funds from Russian financial markets, which would lead to the sudden loss of support for financial stability.

Up to half of Russia’s central bank’s foreign exchange reserves have been frozen overseas due to Western sanctions. The bank also announced enhanced capital controls on February 28, prohibiting residents from transferring foreign currency abroad.

The Financial Times reported that Putin announced on Monday afternoon that he would ban all local residents from transferring foreign currency abroad, raising fears of a public debt default. Tim Ash, an economist at BlueBay Asset Management, said that there is a real possibility that Russia will default, and the fall of Russian power is truly astonishing.

According to Tradeweb data, Russia’s dollar-denominated bonds collapsed on Monday, and the price of the largest government bond due in 2047 was cut in half, and the trading price was only 33% of its face value, which is equivalent to falling into a “distressed” rating (meaning that the debtor has defaulted). or very likely to default, junk bonds with a spread of at least 10 percentage points to U.S. Treasuries).

S&P Global downgraded Russia’s sovereign credit rating to “junk” on February 25.

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