Pimco/Russia bondholders: dicing with debt

Bond investors appear to have finally given up hope on Russian debt. As Russia and its banks become increasingly cut off from key financial infrastructure, the market now assumes it will no longer make its foreign debt payments.

Government dollar bonds due to be repaid in 2027 are now trading at the deeply distressed level of 8 cents on the dollar. A default may come as soon as April 15, which will mark the end of a 30-day grace period if payments worth $107mn due next week are missed.

Pimco is among a large group of global investors that could be on the hook for billions of dollars of losses if Russia defaults. The California-based fund manager had at least $1.5bn of sovereign debt and about $1bn of bets on Russia via the credit-default swap market, the FT reports. Goldman Sachs, Payden, Ashmore and Western Assets are others that have exposure to Russian debt, according to Morningstar.

A non-payment on any part of its $39bn foreign debt would not be for a lack of cash. Russia had nearly $630bn in gold and forex reserves at the end of January. While the bulk of this is parked overseas, over a third is held domestically or abroad in China, which has not agreed to enforce sanctions against it.

Instead, Western sanctions and Moscow’s own capital controls create difficulties in getting payment to foreign creditors. Russia and Russian companies are only allowed to service its dollar and euro-denominated debt in roubles. An exception is made for creditors from countries that have not imposed sanctions on Russia.

Still a default is not a foregone conclusion. Gazprom successfully made payment on its $1.3bn dollar-denominated bond this week. Russia would probably also be wary of its frozen overseas assets — including the hundreds of billions of dollars in foreign reserves — getting impounded to repay defaulted debt. There is the question of whether payment in roubles on dollar debt constitutes a default. But for vultures with a high tolerance for risks, now would be the time to buy Russian debt. The rest will wait.