In addition to bonds crumbling to distressed levels, the conflict has left its mark on multiple markets. The ruble has plunged about 35% against the dollar this year, and local stock trading has been shut for two weeks.
Russia’s late-1990s default was on domestic debt, so a foreign-currency default would be the first since the aftermath of the 1917 Revolution, when the Bolsheviks refused to recognize the czar’s debts.
On Monday, Russia’s Finance Ministry issued an order to pay the $117 million, although it didn’t specify the currency. Using rubles isn’t an option for this week’s coupons, based on the terms of those bonds.
If Russia doesn’t meet its obligations, there’s technically a 30-day grace period that gives it until April 15 to make good.
An official default declaration could also kick off claims on credit default swaps, insurance-like instruments designed to cover losses if a country or company fails to meet its debt obligations.
According to Siobhan Morden, a fixed-income strategist at Amherst Pierpont, Russia’s dramatic, and sudden, plunge from investment-grade to a financial no-go area will worsen losses for debt holders.
“When a default is a slow train wreck due to policy mismanagement, you can reduce the economic impact and contain losses by gradually selling assets,” she said. “What makes this unique is this is a very sudden shock that catches everyone off guard.”
At Franklin Resources Inc., one fund marked down its Russia bond holdings by more than half to $194 million as of Feb. 28. BlackRock funds exposed to Russia fell by more than 90% after the invasion, and clients now have less than $1 billion invested, down from about $18 billion at the end of January. The decline probably reflects a range of factors, from writedowns to client redemptions since the war began.
Others with major exposure to Russia include Ashmore Group, an emerging-markets specialist, while Capital Group and Fidelity are among the top holders of Russia’s dollar bonds, according to data compiled by Bloomberg.
About $120 billion of the current outstanding government and company debt is denominated in dollars, with the bulk of the remainder in euros, according to data compiled by Bloomberg. Roughly $25 billion was issued by Gazprom, the state-owned natural-gas giant.