Russia’s debt default

Russia’s debt default

Why in the news?

The White House said on Monday that Russia had defaulted on its international bonds for the first time since the Bolshevik revolution, as sweeping sanctions amid Moscow’s war on Ukraine have effectively cut the country off from the global financial system.

Details:

• Russia kept on paying on its Eurobonds in foreign currency
• Yet its dollar and euro coupon transfers (forex coupon payment) made did not reach investors.
• The non-receipt of money by investors did not occur because of lack of payment but due to the third-party (foreign financial intermediaries) payment delays.
• Debt obligations would be considered fulfilled once a rouble payment equal to the forex amount due was made. Bondholders would need to open an account at a Russian bank to receive such a payment.
• The Group of Seven major Western powers banned transactions with Russia’s central bank and froze its assets held in their jurisdictions, worth about $300bn, after Russia invaded Ukraine in February.

Concept:

A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a year divided by the face value of the bond in question).It is also referred to as the coupon rate, coupon percent rate and nominal yield.

For example, a $1,000 bond with a coupon of 7% pays $70 a year. Typically these interest payments will be semiannual, meaning the investor will receive $35 twice a year. Because bonds can be traded before they mature, causing their market value to fluctuate, the current yield (often referred to simply as the yield) will usually diverge from the bond’s coupon or nominal yield. For example, at issue, the $1,000 bond described above yields 7%; that is, its current and nominal yields are both 7%. If the bond later trades for $900, the current yield rises to 7.8% ($70 ÷ $900). The coupon rate, however, does not change, since it is a function of the annual payments and the face value, both of which are constant.

When these coupon payments are made in foreign currencies, it is known as the forex coupon payment.