US Treasury Secretary: "Legal Action if Default Declared... Suspension of Government Bond Issuance This Year" (Summary)

Anton Siluanov, Russian Minister of Finance Photo by Yonhap News

[Asia Economy Reporter Jeong Hyunjin] Russia has stated that Western countries are artificially creating Russia's default (debt default) and expressed its intention to respond with legal lawsuits if a default is declared. Considering excessive borrowing costs, Russia has decided to halt additional government bond issuance for this year.

According to Bloomberg and Russian TASS news agencies on the 10th (local time), Anton Siluanov, Russia's Minister of Finance, said in an interview with the pro-government Russian media outlet Izvestia, "We have taken all necessary measures to ensure that investors can recover their investments." He added that Russia will present evidence documents to the court showing efforts to repay investments in both foreign currency and rubles.

According to the Russian Ministry of Finance, as of February 1, Russia's external debt totaled $59.5 billion, including $38.97 billion (approximately 48 trillion won) in government bonds. Minister Siluanov emphasized, "(Legal action) will not be an easy process and will involve many difficulties, but we will actively prove it."

Russian President Vladimir Putin signed a presidential decree on the 5th of last month allowing repayment of foreign currency debts to countries unfriendly to Russia in the Russian currency, the ruble, as a response to Western sanctions against Russia. Accordingly, the Russian government or companies open accounts in the name of creditors at Russian banks and pay foreign currency repayments converted into rubles at the exchange rate on the payment day through these accounts.

On the 7th of last month, the Russian government designated 48 countries, including South Korea, the United States, the United Kingdom, Australia, Japan, and 27 European Union (EU) member states, as unfriendly countries due to hostile actions against Russia, its companies, and citizens through a government decree.

The U.S. Treasury Department, which had been imposing sanctions on Russia, initially planned to apply exceptions for foreign currency payment processing related to capital transactions of Russian public institutions by U.S. banks until May 25. However, due to the stalemate in the Ukraine crisis, it strengthened pressure by suspending this exception on the 4th. The principal and interest payments on Russian government foreign currency bonds maturing in March were paid in dollars under the exception clause, but this measure reversed the situation.

On the 4th, the scheduled payment amount for Russia's foreign currency debt was $640 million, including $550 million principal of bonds maturing in 2022 and $84 million interest on bonds maturing in 2042. With U.S. banks declaring suspension of foreign currency payment agency services, the Russian government announced plans to pay the amount in rubles to Russian deposit institutions and then exchange it for dollars afterward. Russian Railways also attempted to fulfill a $600 million payment maturing on the 5th in rubles.

Recently, as Russia attempted partial ruble repayment of dollar bonds, the probability of Russia defaulting within one year, according to credit insurance statistics, soared to an all-time high of 99%. As default concerns grew, Russian government bond prices plummeted, and the Russian CDS (credit default swap) quotes in the credit derivatives market surged. Some market participants are believed to have made significant profits through arbitrage in this situation, and rumors circulated that three firms?JP Morgan, Goldman Sachs, and Barclays Capital?generated $250 million in profits from Russian bond and derivative transactions.

Global credit rating agency S&P has downgraded Russia's credit rating to 'SD (Selective Default),' just one step before default.

Minister Siluanov also said on the day, "Due to excessive borrowing costs, we will not issue bonds for the remainder of this year." Russia has issued ruble-denominated government bonds worth 128 billion rubles (approximately 1.8483 trillion won) this year, falling far short of the initial first-quarter target of 700 billion rubles.