According to Morgan Stanley & Co., the chances of Russia making its foreign debt payments are decreasing as bond prices fall, a recession looms, and various payment restrictions pile up following the invasion of Ukraine.
In a Monday note, Simon Waever, the firm’s global head of emerging-market sovereign credit strategy, wrote, “We see a default as the most likely scenario.” “In the event of a default, it is unlikely to be similar to a normal one, with Venezuela perhaps being the most relevant comparison.”
The default could occur as soon as April 15, when the Russian government’s 30-day grace period on coupon payments due on dollar bonds due in 2023 and 2043 expires, he said.
According to Bloomberg data, investors value the 2023 bonds at around 29 cents on the US dollar, the lowest ever, though no trades appear to have occurred at that level. The debt was trading above par in the days leading up to Russia’s invasion of Ukraine last month.
While sovereign debt rarely falls into the single digits, Morgan Stanley believes Russia’s bonds “could get close.” The only recent examples of a country’s debt falling so low are Lebanon and Venezuela.
More than four years ago, the South American country and its state oil company, Petroleos de Venezuela S.A., defaulted on a combined $60 billion in debt. Following a contested presidential election the year before, the United States imposed sanctions prohibiting trading in the securities in 2019. Some of the bonds are now trading for pennies on the dollar.
JPMorgan Chase & Co. announced on Monday that it will remove Russian bonds from all of its widely followed indexes, further isolating the country’s assets from global investors. Venezuelan dollar bonds were also removed from the bank’s benchmark indexes in 2019 after trading was halted due to sanctions.
Russia, according to Waever, is similar to Venezuela in that it has significant oil assets that will only come into play once sanctions are lifted. If bonds default and creditors obtain court judgments, he wrote, one upside risk would be the ability to access all assets now frozen outside of Russia, including foreign exchange reserves.
Five-year credit-default swaps have risen to more than 2,500 basis points as investors factor in a higher likelihood of missed payments as the war escalates. Meanwhile, according to data compiled by a Bloomberg index, investors in Russia’s sovereign debt have suffered average losses of 81% since the beginning of the year. Only Belarusian government dollar debt performed worse in 2022, with losses of 93 percent, according to the data.
Nonpayment could be linked to Russia’s unwillingness to pay foreign creditors as a result of sanctions imposed by the United States and its allies. According to Morgan Stanley, there is some uncertainty about whether US banks will be allowed to accept coupon payments from Russia’s Ministry of Finance. According to the Finance Ministry in Moscow, payments to foreign investors will be contingent on sanctions imposed on Russia and “exemptions established by the relevant licences and permits.”
“The possibility of significant additional selling will put additional downward pressure on prices,” Waever wrote. “At this point, we see very little reason for any investor to invest in Russian sovereign bonds.”