Top Derivatives Panel to Rule If Russia’s Ruble Payouts Trigger Default Swaps

(Bloomberg) -- A panel of dealers and investors will assess whether Russia failed to properly meet its bond obligations, paving the way for insurance payouts on the debt as the country slips closer to a default.

The Credit Derivatives Determinations Committee was asked to review whether a “failure-to-pay event” occurred for credit-default swaps after Russia last week made two dollar-bond payments in rubles, breaching the terms on that debt. It will meet on Wednesday, and a ruling will affect contracts insuring $40 billion of the country’s debt.

Sanctions imposed because of Russia’s invasion of Ukraine have cut it off from the financial system and hampered bond payments, putting the sovereign on the brink of its first default on external debt in more than a century. The transfer of rubles was made after foreign banks declined to process dollar coupons due April 4, and S&P Global Ratings subsequently cut the government to “selective default.”

Investors have been pushing for clarity on what could trigger the derivatives since the latest sanctions were imposed on Russia.

Earlier this week, the CDDC ruled that Russian Railways JSC swaps will be triggered after an interest payment was blocked, setting a possible precedent for the sovereign. The company responded Tuesday saying it considered its obligations fulfilled even if the money didn’t reach creditors. 

Russia’s government has made a similar argument about its payments, blaming the sanctions rather than any unwillingness on its part to pay.

“There is still a grace period and they have still the opportunity to fulfill the U.S dollar payments,” said Jochen Felsenheimer, a managing director at XAIA Investment in Munich, referring to the 30-day allowance under the bonds’ terms.  “I would expect a credit event when the grace period ends.”

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