Business Updates: S&P Global Places Russia in ‘Selective Default’
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S&P Global has placed Russia under a “selective default” rating after the Russian government said last week that it had repaid about $650 million in dollar-denominated debt in rubles.
The ratings agency said late Friday that it didn’t expect investors to be able to convert the ruble payments into U.S. dollars that were equivalent to the original amount due, pushing Russia toward its first default on foreign currency sovereign debt in more than a century.
The bonds do have a 30-day grace period, giving the Russian government time to repay in dollars or find some other way to avoid a default. S&P Global said it didn’t expect the government to convert the payments within the grace period.
“Sanctions on Russia are likely to be further increased in the coming weeks, hampering Russia’s willingness and technical abilities to honor the terms and conditions of its obligations to foreign debt holders,” the ratings agency said.
On April 4, a dollar-denominated Russian government bond matured and another coupon payment came due. That same day, the U.S. Treasury Department tightened its restrictions on Russian transactions in an effort to force Russia to choose between draining the dollar reserves it has on hand or using new revenue to avoid defaulting on its debt. The department blocked Russia from using dollars held in American banks for its bond payments, and the transactions weren’t completed by JPMorgan. Subsequently, the Russian finance ministry said it paid the debt in rubles.
While the finance ministry said it considered its debt obligations to have been fulfilled “in full,” the rating agencies have said that payment in a currency different from the one that was agreed upon would be a default. Neither of the bonds with payments due on April 4 had a provision for payment in a currency other than dollars.
Sanctions, including freezing the central bank’s reserves held overseas, were imposed on Russia after its invasion of Ukraine in late February. The ratings agencies then cut Russian debt to junk status and investors bet on a default. But for weeks, Russia continued to make debt payments. U.S. authorities permitted the transactions and said American bondholders would be allowed to receive debt payments, despite the sanctions, until May 25.
If Russia doesn’t repay the debt in dollars, it’s unclear how the issue will be resolved. By the time the 30-day grace period on the April 4 bond payments expires, credit rating agencies will be barred by European Union sanctions from providing any ratings to Russian entities and won’t be able to make a judgment on whether a default has occurred. The companies are withdrawing all their ratings ahead of the E.U.’s April 15 deadline.
Last month, Russia’s finance minister, Anton Siluanov, accused the countries that have frozen Russia’s internationally held currency reserves of trying to create an “artificial default.” Last week, the finance ministry said if the reserves were unfrozen, then the ruble payments could be converted to dollars.
S&P Global also said on Friday that it held its “CC” junk debt rating for Russia’s sovereign debt in rubles (known as local currency debt) because it wasn’t sure if nonresident bondholders were able to access their coupon payments.
According to documents on the Russian finance ministry’s website, coupon payments for local currency bonds were being paid. But in March, Russia blocked interest payments to nonresidents.
“Definitive information on the payment process is currently not available to us,” the agency said.
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Société Générale, France’s third largest bank, said on Monday that it would pull out of Russia by selling its controlling stake in Rosbank, a Moscow-based lender, to Interros Capital, a company headed by Vladimir O. Potanin, one of Russia’s wealthiest men.
Société Générale said the deal, which includes the sale of a Russian insurance subsidiary, would allow it to “exit in an effective and orderly manner from Russia, ensuring continuity for its employees and clients.” The French lender is among the European banks most exposed to Russia.
The bank said in a statement that the sale would result in a hit of 3.1 billion euros ($3.3 billion), comprising a financial write-off of about €2 billion and a related charge of €1.1 billion.
Shares in Société Générale rose more than 7 percent after the news was announced.
Mr. Potanin owns, among other things, Norilsk Nickel, the world’s largest nickel producer, with vast operations in Siberia. This month, Canada added him to its financial sanctions list. Last month, Mr. Potanin stepped down as a trustee of the Guggenheim Museum, a position he had held since 2002.
Banks in France, Italy and Austria have the largest exposure to Russia, according to data from the Bank for International Settlements.
Austria’s Raiffeisen Bank employs 9,000 people in its Russian operations, which account for about 10 percent of its assets. The company said last month that it was “assessing all strategic options” for its business there.
Italy’s UniCredit employs some 4,000 in Russia and estimated its net exposure at €1.9 billion, although it recently warned that the financial hit from an “extreme scenario” could be much larger. Before the invasion of Ukraine, UniCredit had been trying to sell its stake in the company that controls Alfa Bank, one of Russia’s largest privately owned banks, which has been complicated by international sanctions against the lender.
Société Générale first acquired a 20 percent stake in Rosbank in 2006, buying it from Mr. Potanin’s Interros, and increased its holdings in subsequent years. It stayed in Russia after the global financial crisis forced many Western banks to pull out, some because they had struggled to compete with the state-run consumer banking giant, Sberbank.
French companies have come under fire for remaining in Russia since the invasion of Ukraine while other Western businesses have withdrawn or suspended operations. Last month the Ukrainian president, Volodymyr Zelensky, addressed the French Senate and called on retailers like Leroy Merlin and the carmaker Renault to pull out and “stop being responsible for Russia’s war machine.”
Since then, Renault announced it would immediately suspend the activities of its Moscow factory and review its business in Russia. And Decathlon, a French sporting goods giant, said it would suspend operations at its 60 Russian stores because sanctions had made it difficult to continue importing goods.
A slew of companies have announced plans to stop business in Russia over the last several weeks, and many of them are now sharing what those decisions may cost them.
Some companies had limited exposure to Russia and signaled that the expected losses were not significant. JPMorgan Chase’s chief executive, Jamie Dimon, told shareholders that the bank wasn’t “worried” about the impacts from leaving Russia. For industry giants like Shell, the financial hit — while large — accounts for just a fraction of their overall profits.
On Monday, Société Générale, France’s third-largest bank, said it would take a hit of $3.3 billion in a deal to sell the company’s controlling stake in Rosbank, a Moscow-based lender, to Interros Capital. The deal would allow the bank to “exit in an effective and orderly manner from Russia, ensuring continuity for its employees and clients,” the company said.
Here are some of the expected impacts that companies have disclosed:
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BNY Mellon said it may lose as much as $200 million in revenue — about $100 million this quarter and an additional $80 million to $100 million over the rest of the year. It has ceased new business with Russia and “suspended investment management purchases of Russian securities,” a spokesman for the company said.
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JPMorgan Chase’s chief executive, Jamie Dimon, said in an annual letter to shareholders that the bank could lose $1 billion “over time” because of its exposure to Russia. Last month, the bank announced that it was winding down business in Russia and would not be pursuing new ventures there.
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Shell said in an update to shareholders that its decision to leave Russia would cost the company $4 billion to $5 billion in this quarter alone. The oil giant began cutting ties with Russia in February and said last month that it would stop buying oil and gas from Russia and shutter its service stations in the country in a “phased withdrawal.”
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Société Générale said it would take a financial hit of $3.3 billion in a deal to sell the company’s controlling stake in Rosbank, a Moscow-based lender, to Interros Capital.
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Volvo said it was setting aside about $423 million to make up for losses it anticipated in the first quarter because of Russian exposure. The carmaker has suspended “all sales, service and production” in the country, the company said.
Car prices have helped push inflation sharply higher over the past year, and economists have been counting on them to level off and even decline in 2022, allowing the rising Consumer Price Index to moderate markedly.
But dealerships are wrestling with inventory shortages — the result of a dearth of computer chips, production disruptions and other supply chain snarls. That’s not a problem just for car buyers, who are paying more; it’s also a problem for economic policymakers as they try to wrestle the fastest inflation in four decades under control, Jeanna Smialek reports in The New York Times.
And it is increasingly unclear how much and how quickly car prices will slow their ascent, because of repeated setbacks that threaten to keep the market under pressure. While price increases are showing some early signs of slowing, and used car costs in particular are unlikely to climb at the same breakneck pace as last year, continued shortfalls of new vehicles could keep prices elevated — even rising — longer than many economists expected.
“If I could get 100 Toyotas today, I would sell 100 Toyotas today,” said Corina Diehl, a dealership owner in the Pittsburgh area. Instead, she said, she’s lucky to have three. “It’s the same with every brand I have.”
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Bank earnings: JPMorgan Chase, Wells Fargo, Citigroup, and Goldman Sachs are set to release their first-quarter earnings this week. Economists will get a better snapshot of the impact they expect the war in Ukraine to have on their businesses.
Tuesday
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Consumer Price Index: The latest report on inflation from the Labor Department is expected to show that consumer prices climbed to their highest levels in more than 40 years in March. Economists expect prices rose about 8.4 percent from a year earlier, a jump that could make the Federal Reserve raise interest rates at a larger scale than previously anticipated.
Wednesday
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Delta earnings: Delta Air Lines is set to publish its financial performance report for the quarter that ended in March. Economists will get a better idea of how the airline was affected by the rise in fuel prices last month and what that could mean for fares.
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Inflation in Britain: The Consumer Price Index is expected to show prices rose 0.8 percent in March from the previous month. The data will start to show the effects of the war in Ukraine after Britain imposed sanctions against Russia, including a ban on oil imports that led to soaring energy prices.
Thursday
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Retail sales: The Commerce Department will release its monthly retail sales report, which is expected to show a 0.6 percent gain in spending for March. Economists note that the rise in consumer prices could inflate sales data in the coming months.
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Consumer sentiment: The University of Michigan will report preliminary results for its survey of consumer sentiment, which measures Americans’ outlook on the economy. For the last several months, the index has shown that consumers were pessimistic about the year ahead because of inflation, and the potential impact of the Russian invasion of Ukraine on the economy.
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E.C.B. interest rates: The European Central Bank will deliver its interest rate decision after policymakers announced plans in March to end its pandemic-era bond-buying program. Economists are awaiting more details on the bank’s plan to end its older bond-buying effort in the third quarter amid persistent inflation.
Friday
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The U.S. stock market will be closed in observance of the Good Friday holiday.
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President Volodymyr Zelensky of Ukraine called again on Saturday night for sanctions targeting Russian oil and gas, saying the wealth provided by that business was paying for the Kremlin’s war efforts and sustaining its “sense of impunity.”
Speaking in his nightly address, Mr. Zelensky pushed for “more painful restrictions” on Russia’s cash flows, saying an oil embargo “should be the first step.”
Although the European Union, the United States and other nations have imposed severe sanctions on the Russian government, banks and wealthy people, European nations reliant on Russian energy have resisted cutting themselves off from those imports.
Mr. Zelensky’s remarks capped a day of diplomacy that included a visit from Britain’s prime minister. The Ukrainian president renewed the argument over Russia’s gas industry on Saturday night.
“Russia can still afford to live in illusions and bring new military forces and new equipment to our land,” Mr. Zelensky said. He added: “Oil is one of the two sources of Russian self-confidence, their sense of impunity.”
European leaders approved a ban this week on Russian coal, the imported energy source that would be the easiest to replace. Europe’s largest economy, Germany, is among the states in the bloc most reliant on Russian energy overall, with gas heating one out of two German homes and powering much of Germany’s export industry.
Germany’s chancellor, Olaf Scholz, met this week with Britain’s prime minister, Boris Johnson, who urged his counterpart to shift away from Russian oil. “We are doing all we can, and we are doing a lot,” Mr. Scholz said on Friday, warning that it would require massive investments to install the infrastructure to import gas from other countries.
Mr. Johnson met with Mr. Zelensky in Ukraine’s capital, Kyiv. Mr. Zelensky said that they had discussed new sanctions against Russia, though he did not describe them.
He framed support for Ukraine as a defense of Europe at large.
“Russian aggression was not intended to be limited to Ukraine alone, to the destruction of our freedom and our lives alone,” Mr. Zelensky said. “The whole European project is a target for Russia.”
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Epic Games, the creator of Fortnite, said Monday that it had raised $2 billion from investors to help it “build the metaverse,” an idea for an expansive virtual-reality world, valuing the company at $31.5 billion. Half of the money was from Sony, the developer of the PlayStation game console, and the other half from Kirkbi, the company behind the Lego Group. Last week, Epic and Lego said they were entering a long-term partnership to help “shape the future of the metaverse.”
Source: https://www.nytimes.com/live/2022/04/11/business/economy-news-oil-russia
