Swaps Ruling May Complicate a Russia Default Insurance Payout

(Bloomberg) -- Roughly $13 billion of Russian government debt could be ineligible to be delivered in a credit-default swaps auction, a panel of banks and investors ruled Friday, potentially complicating hedges against a Russia default.

After three days of meetings, members of the Credit Derivatives Determinations Committee said that because of a feature in the six bonds allowing the government to make payments in rubles -- rather than the dollars or euros they were issued in -- they would be ineligible as so-called deliverable obligations.

As a default by Russia becomes increasingly probable, investors have been loading up on credit swaps tied to the country, while also scrambling to read the small print on about $40 billion of the contracts. CDS are insurance-like instruments designed to cover losses if a country or company fails to meet its obligations.

Putin Decree

Concern over a default intensified after a decree by President Vladimir Putin ordering Russian debtors to pay their foreign creditors in rubles in Russian bank accounts, regardless of the currency in which the debt was issued. The CDS panel said that the mere existence of the alternative payment option made the six dollar and euro bonds ineligible as deliverable obligations.

The swaps market has been signaling a high likelihood that Russia will default and that investors would get adequately compensated. That's despite the questions surrounding whether or not all of Russia's foreign debt could be used to settle the contracts.

CDS prices are indicating an 82% chance Russia defaults within five years, according to ICE Data Services.

The government has $117 million worth of coupons on dollar bonds coming due on March 16 that don't have the embedded ruble option. If Russia pays those in rubles, it would be an event of default and trigger the credit swaps.

The panel was asked to consider bonds with the following maturities: 2025, 2027, 2029, 2032, 2035, 2036