Russia - why the change of heart by OFAC on the default question?
Still not getting any joy/feedback on why the Office of Foreign Assets Control seemed to blink around the Russia default.
The market was certainly taken by surprise as evidenced by the massive rally in Russia on April 22.
I don't remember such a huge rally on one bond, which does suggest the prior steer for the market had been that default was going to happen. And this seemed to be the read really from the CDS determination committee. So what changed?
Thinking through the explanations:
1. I just cannot think that OFAC caved into lobbying from US holders. Let's face it these guys should have listened to their own government's clarion call in the months leading up to the invasion that a) the invasion was happening with a high probability, and b) that nightmare sanctions were then coming, so they should really get out of Russian assets. And in the end, US strategic interests cannot/should not come second to the interests of a few bondholders.
So the question here is what is in US strategic interests here, Russian in default/or still remaining current?
And it's not as though Western holdings of Russian debt were any longer significant enough to represent a globally systemic risk - much less than 1998, at something like $20bn on the sovereign side, multiples lower than 98.
So a Russian default 22' was not going to really cause much ripple effect on global markets.
2. I don't also really buy this idea that allowing Russia to service its debt further drains Russian liquid FX reserves beyond the reach of OFAC. The numbers we are talking about on the debt service front really do not touch the sides, when Russia has what, $300bn plus beyond the reach of OFAC?
Last week's payment was less than USD700m so less than one day's energy payments from the EU to Russia.
For me then it is a cost/benefit call, a marginal loss in liquid FX reserves by Russia against a massive long-term loss for Russia is going into default - which will have a huge hit in terms of higher borrowing costs for longer, lower investment and growth.
3. Maybe some legal determination that even by obstructing the payment, or stopping US institutions from processing the payment, OFAC's legal case for pushing for default was weak and subject to challenge.
The latter suggests then that OFAC has a weak hand in all this, and that Russia can continue to pay from unfrozen accounts and stay out of default, whatever it is doing in Ukraine. This sounds more likely.
No clear steer from OFAC on any of this, or indeed whether OFAC will extend the general license on allowing Russia to continue servicing its external debts beyond May 25.
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