In the midst of the bloody slaughter that is Russia’s unprovoked invasion of Ukraine, the multitude of war crimes, Ukrainians with hands wired behind their backs and a bullet in their head, tongues cut out, bodies left to decompose in the streets behind retreating Russian forces, wholesale rape of girls and women, and the imposition of crushing economic sanctions by the west — it isn’t enough — Russia continues the charade that it is a part of a modern, global, civilized, financial world.
The Russians are desperately trying to preserve their sovereign nation bonds and to prevent them from going into default.
For the record, sovereign Russian bonds are trading with an identical credit rating as Cuba and Argentina, two notoriously failed states. Existing issues have lost 75% of their nominal value.
This Monday, there was a mandated, substantial, USD bond payment of approximately $650,000,000 due ($552.4MM principal, $84MM coupon). Russia attempted to make the payment by transferring funds in the United States to the paying agent, an American bank, to disburse the payments to bond holders.
The US government has frozen the Russian account from which the funds were to be transferred — all Russian accounts in the US are frozen — and disapproved the transfer of USD to the paying agent. The payment was not made.
In five prior bond payments, the US Department of Justice has approved the payment, but there is a tougher regime of enforcement in place now and, so, the US DOJ said, “No.”
What happens now, Big Red Car?
This places Russia in the following dilemma:
1. Russia can make the payment from USD accounts it controls that are not frozen within Russia thereby impacting their foreign currency liquidity and act as if it is “business as usual for Vlad and his thugs.”
2. Fail to pay and trigger a formal 30-day cure period in which to make the payment without default after which the bonds will be in default thereby triggering a series of linked defaults.
3. Essentially if Russia defaults on a single bond, then all its bonds fall into default and the nation falls into a category of credit beneath Cuba and Argentina. (Yes, there is one, but only one, that of a defaulted issuer.)
I predict Russia will wail and moan and . . . . . DEFAULT . . . . . with a lot of gnashing of teeth about how the west is “canceling Russia.” Boo hoo.
So what, Big Red Car?
There are several practical implications.
1. Russia and Putin thought it had built more than adequate financial reserves to protect itself against an economic reaction from the west. They put aside almost $700B in foreign currency reserves <<< yes, funded by massive energy payments from the west, you morons.
Putin did not anticipate the severity of the west’s financial sanctions — not a huge blunder given dainty western reaction the last time he invaded a sovereign nation, also Ukraine, in 2014 when he invaded and conquered Crimea.
2.Putin can’t get to much of his frozen funds and is likely never to touch them again.
The Central Bank of Russia would have one believe that the original stash of $700B +/- is now $600B +/-, but what is not abundantly clear is how much of that is actually addressable.
I think the addressable number is less than half and that isn’t going to be enough.
The loss of 15% of the nation’s liquidity in a month is not a small hit. This burn rate is clearly unsustainable though nobody is even whispering that. It will get worse, much worse. Please, God.
3.Part of Putin’s shtick — in addition to razing cities filled with civilians, murdering civilians, raping women, and killing babies — is the idea that he is The Man and that the western attempts to “cancel” Russia and to depose him don’t faze him.
Putin desperately wants the world to believe he is on top of his game, things are going swimmingly, his half dozen yachts are all in fine fettle, and that he will be the last cockroach standing.
Clearly, Putin and his shitty, vicious army and his financial plan are not hitting their marks.
4. When bond defaults occur, Putin will cry like a little bitch that the west is trying to “cancel” the great Russian Empire, but the bond gnomes will be spending their time in court going after offsetting Russian assets — like those cash reserves.
If Putin thinks a Ukrainian with a Javelin is a bad day wait until he runs into bond attorneys in American courts.
What nobody really focuses on is this: Russian GDP is 25% less than Italy’s. Russian GDP in the next year will be cut by as much as 40% and will continue to slide thereafter. Russia is going to turn the clock back 20 years.
In addition, WTF is wrong with disconnecting Russia from the civilized world and turning them into North Korea or Cuba on the steppes? I love the idea.
Bottom line it, Big Red Car
I think the bottom line is this, dear reader.
Eeny, meeny, miny, moe,
Catch a war criminal by his financial toe,
If he hollers, do not let him go,
Eeny, meeny, miny, moe!
Whatever the US can do to cancel Russia, it needs to do and do more. It is starting to work.