Although at this point I doubt that there are people who do not know about the sanctions imposed on Russia, such as the exclusion of seven Russian banks from the SWIFT messaging system, the exclusion of Russia from the main world indices, the freezing of the assets of certain people or oligarchs with immediate effect, limit transactions with the Russian central bank as well as sanctions on Belarus, the export of some goods of the Russian oligarchs, among others.
Undoubtedly, in the midst of this warlike environment and the series of sanctions imposed by the West, the ruble and Russian securities have collapsed, leading to an extremely difficult situation for the payment of the issue of coupons of the issued debt. for the Eurasian country. Additionally, I gave the interview to Siluanov, russian finance minister In an interview on state television broadcast yesterday Sunday, Russia has lost access to almost half of its international reserves, “the total volume of our reserves is about 640,000 million dollars and there is about 300,000 million dollars in such a condition that we cannot use it now“, According to Siluanov.
The last time Russia defaulted on its debt was in 1998.after the collapse of the Soviet Union and its weakening after the costs of the war with Chechnya, which reduced its ability to pay, the so-called ruble crisis, caused collateral damage to neighboring economies and the world financial system, especially Management long-term capital.
Since thenand following the sanctions imposed in 2014 following the annexation of Crimea, Russia had strengthened its financial position with budget surpluses and one reduction of its dependence on the US dollarso much so that Russia’s foreign liabilities have shrunk from about $733 billion in 2014 to about $480 billion today.
Although Russia has relatively low levels of debt issuancewith a financial sector that is much less integrated with the rest of the world, there are some analysts, such as the chief economist of the World Bank, Carmen Reinhart, who warn of “Being very close” to default both Russia and Belarus. Despite the fact that about 10 days ago it paid interest on one of its local ruble-denominated bonds, the money may not be “enough for foreign holders” as a result of the series of sanctions.
The State has about 40,000 million dollars in bonds in foreign currency denominated in dollars and euros, which compared to the size of its economy and comparable nations is a small amount. The problem worsens when considering Russian corporate debt, which rose by just under $100 billion on Outstanding international bonds.However, Russian debt has plummeted, with CDS at record highs:
A key test will come this Wednesday sixteenwhen the Russian state has to face the payment of two coupons or regular interest is 117 million dollars of any of its debt denominated in US dollars and covered by CDS. In the event that the sanctions interfere with the CDS contract settlement mechanism, investors who used CDS as a hedge or “hedge” against losses in bonds due to defaults could be affected and benefit those counterparties who sold the CDS by limiting their payments. in case of non-compliance.
However, there is a grace period of 30 days, which means that the breach will not formally occur until at least April. Despite the fact that the Russian Ministry of Finance said that they will service and pay their sovereign debts in full, President Putin has said that Russian entities will be able to pay their debts in foreign currency in rubles at the exchange rate established by the Russian Central Bank. .
Among the main investors in Russian debt includes hedge funds and some Large managers such as Pimcowhich according to the Financial Times, is one of the largest holders of Russian bonds in the worldwith a position of $1.5 billion in Russian sovereign debtto which must be added his position of at least $1 billion in derivatives markets o CDS (credit default swaps), which are like insurance that Pimco sells to investors in exchange for a premium, and in the event that the issuer of the underlying bonds (in this case Russia) defaults on its Pimco payments has to compensate the holders and could carry out facing losses of 2,600 million dollars. It appears that Pimco has already priced its positions down given current market conditions.
Most CDS would be in at least five funds of Pimco, one of them the Pimco Income Fund (registered for sale in the US), managed by Daniel Ivanscyn (chief investment officer), Joshua Adnerson and Alfred T. Murata and which grew to approximately $140 billion in assets, 4 Morningstar stars, with a return of so far this year of -6.12%. At the end of 2021, the fund revealed that it had underwritten $942 million in CDS (0.67% of total assets)
As well as other funds with smaller assets such as the fund Pimco Total Return, Pimco Diversified Income, Pimco Emerging Markets Bond Fund and Pimco Low Duration.
Pimco’s assets under management rose to more than $2.2 trillion, so the reader can estimate the magnitude of the manager’s positions in Russian debt and CDS.