A second country has become uninvestable – Russia

As many of you know, I first said that China was uninvestable on July 7, 2021. The basic reasons that I offered was no “rule of law” except what is decided by the Chinese Communist Party. No “due process” except as decided by the CCP. Further, China will not allow many companies to be audited or have third-party verification, which means that no one has any idea if the financials are accurate or not. I have spoken about this issue a number of times in my commentary, and now a second country has entered into this rarefied space, though for very different reasons.

Russia

The Bank of Russia issued new rules last week, with measures that included a freeze on local security sales by foreigners. It has left foreign investors, who held almost $29 billion in debt at the start of February, unable to collect income on their holdings, which are now blocked from sale by restrictions.

“Issuers have the right to make decisions on the payment of dividends and the making of other payments on securities and transfer them to the accounting system,” the central bank said. “However, the payments themselves will not be made by depositories and registrars to foreign clients. This also applies to Russian sovereign debt.” The decision by the central bank was taken to “avoid mass sales of Russian securities, the withdrawal of funds from the Russian financial market and to support financial stability,” they stated.

Russia’s Government bonds, RFLB 6.90 7/23/31, were priced at $90.15 at the beginning of the year, and they closed Friday at $72.04 – quite a decline. The yield on this bond is now 12.20%. The Russian ruble was worth 0.0133 at the start of 2022, and now its value is 0.0082. This precipitous drop began with the initiation of the Ukraine invasion.

On Sunday, Moody’s cut the rating on Russia’s debt to “Ca,” stating that its decision to cut Russia’s rating was “driven by severe concerns around Russia’s willingness and ability to pay its debt obligations.” Russia’s economy has been plunged into crisis as a result of harsh sanctions imposed by the West, which include freezing assets of the central bank held overseas and severing several Russian banks from the SWIFT international payments systems. Moody’s went on to say that, “The likely recovery for investors will be in line with the historical average, commensurate with a Ca rating. At the Ca rating level, the recovery expectations are at 35% to 65% (of face value).”

Moody’s and the other major ratings agencies, Fitch and S&P Global, had scored Russia at investment grade levels of Baa3/BBB as recently as March 1. All three have since cut their scores several notches, putting the sovereign deep into “junk” territory. S&P rates Russia at “CCC-” while Fitch has it at “B” with a negative outlook, meaning a further downgrade is likely. S&P stated, “The downgrade follows the imposition of measures that we believe will likely substantially increase the risk of default.”

Meanwhile, even while Russia did make a partial payment on its ruble-denominated debt, everyone is now focused on Russia’s foreign currency debt. The government is due to pay more than $100 million of coupons on two dollar bonds on March 16. It also has another interest payment due on March 21 and a $2 billion bond maturing on April 4. International bonds have a 30-day grace period, and a failure to pay in that time could trigger credit default swaps, though there’s concern about whether those would pay out as well. Furthermore, with Russia effectively prohibited from making outbound dollar transactions under its new laws, a dollar-denominated default is now just a formality.

Russian Corporate Bonds	Price on 1/2/22	Price on 3/4/22
Lukoil 3.875 5/6/30	$101.64	$36.73
Rosneft 5.80 5/29/30	$93.00	$82.25
Gazprom 3.25 2/25/30	$96.12	$32.56

*Data according to Bloomberg

More sanctions are likely coming, and the political fallout from their invasion of Ukraine continues to build. Make sure you check out any funds that hold foreign debt, and if Russia is one of the countries on the list, I would advise that you consider selling them before the loss worsens even from here. My comment on Russian debt is now clear.

Nyet!!!

Original Source: Author

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.