Oh, this could be interesting. Or it could be blowhard.
We've been talking about Russia defaulting because they can't honor their bonds. They just admitted it.
"What are Eurobonds, capitalized?"Russia retaliated in what it has called an "economic war" with the West on Tuesday by offering to buy back its $2 billion Eurobonds maturing next month in roubles rather than dollars.
Complicated. But they are a contract with a specific currency unit. Not paying in that currency unit is a breach of that contract.
Here's where it gets outside of my knowledge. Russia is offering to pay their nominal value, but I'm pretty sure they're offering it based on what they say the ruble is worth. Not what everyone else thinks. Basically, as we've seen, Russia has a currency exchange rate only they use, whereas in international trade the ruble is being dumped. They're also cheating since you can't just buy a bunch of dollars from Russia, but you can sell your dollars...or euros, or eurobonds, for what Russia claims is fair.The finance ministry offer on Eurobonds maturing on April 4, Russia's biggest debt payment this year, follows Western moves to tighten sanctions against the country over its invasion of Ukraine and to freeze Moscow out of international finance.
It was not immediately clear if bondholders would be forced to accept roubles if they rejected the offer, a move that would break the terms of the bond and would again raise the prospect of Russia's first external sovereign default in a century.
Creditors said it might be aimed at helping Russian holders who now face restrictions in receiving dollar payments.
"This is a tender offer and not a final decision that these bonds will be paid in roubles. Perhaps, Russian authorities want to gauge investors’ willingness to accept payment in roubles?" said Seaport Global credit analyst Himanshu Porwal.
Tim Ash of BlueBay Asset Management, which is not a bondholder, said the move was part of a fight back by Russia's central bank and finance ministry "to fend off default and stabilise markets and the rouble".
Ash said the United States' Office of Foreign Assets Control (OFAC), which enforces U.S. sanctions, "should make clear" it will not extend a deadline of May 25 for U.S. individuals or entities to receive payments on Russian sovereign bonds.
The remaining options are (a) force a default when enough people refuse, or (b) grant an extension and hope Russia somehow gets better, but until then you have a piece of paper of questionable value.
The Russian government sold the bonds for dollars and is now basically doing an ex-post-facto money exchange. I don't see how this move will magically make more dollars appear in the Russian government or bank. And while I completely see Russia letting the rich Putin allies cash out for dollars first to keep them happy, I see even more the Russian government holding those dollars because of how few and precious they are.
There's another half-billion on the way, and a month-long grace period, etc etc. This isn't being decided overnight.
If Russia defaults, it ruins their credit rating and makes it much harder for loyal Russian businesses to borrow internationally. In theory, Russia has dollar cash reserves that can handle this, but probably doesn't want to part with them. They're about to weigh the long-term and short-term benefits of this move. They may yet cave, shrug their shoulders and sigh, handing over $2 billion dollars. Some other novel solution might be reached, like using frozen assets to pay the dollars off.
But there is no good end to this for Russia. They either fulfill their obligations and have even fewer dollars left, or they cut themselves off from future endeavors even harder than they already have.