US Treasury gives green light for Russian insurance payments against default

US Treasury gives green light for Russian insurance payments against default

The US Department of the Treasury in Washington, DC, US, August 30, 2020. REUTERS/Andrew Kelly/File Photo

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WASHINGTON (Reuters) – The U.S. Treasury on Friday issued a special waiver to allow investors with default insurance in Russia, known as default swaps, to receive their payments.

The process of usually straightforward default swap payments was thrown into disarray in June when Washington said its sanctions on Russia represented a total ban on buying Moscow’s debt. Read more

An investor who buys a CDS contract usually delivers the underlying credit to the bank or fund that sold it, the default swaps when the default occurs. It usually involves an auction to set the price, but under penalties, the exchange is effectively illegal.

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The license allows U.S. persons to purchase or receive Russian bonds beginning two days prior to the announced date of the auction, and up to eight business days after the auction takes place.

The committee that sets the auction date is scheduled to meet on Monday at 1300 GMT, having met three times this week.

“OFAC has issued two general licenses (waivers) to help the United States and other global investors come out cleaner from their exposure to Russia,” a Treasury spokesperson said, referring to the Office of Foreign Assets Control, which imposes US sanctions. To the Office of Foreign Assets Control, which imposes US sanctions.

The Treasury’s website added that the move also allows financial institutions to “facilitate, liquidate and settle” newly authorized transactions.

Analysts had estimated that $2.5 billion worth of Russian sovereign debt swaps were held up by the problems.

“This is an example of the fine-tuning of the sanctions apparatus with which the United States has had a lot of experience over the years,” said Jamal El Hindi, a lawyer at Clifford Chance.

“Specific licenses, generic licenses, are used to make sure the general effect of sanctions is to do what they want to do, not prevent things they don’t want to prevent,” he said.

Russia was declared defaulting last month even though it already defaulted in May by failing to pay an additional $1.9 million in interest that accrued on late payments earlier as Western sanctions shut down payment channels.

The confusion saw investors pressure Washington to provide Friday’s provisions, which came alongside another ‘license’ allowing, until October 19, liquidation transactions involving securities issued by Russia-based entities under agreements made before June 6.

“Treasury’s granting of the license made sense and helps fulfill the purposes of the default swaps and why credit swap investment exists,” said Jay Oslander, partner at law firm Wilke Oslander.

“From a financial point of view, this is good news and what we would have liked to see.”

However, a holder of the Russian default swaps said those contracts could have been settled without changing the bonds, and that the waiver could end up in favor of protection insurance sellers like US investment firm Pimco, which owns a large portion of those contracts.

The Treasury’s license effectively allows US entities to buy Russian debt if that purchase is needed to settle insurance payments, meaning companies like Pimco can be left in a long position in state bonds that are currently trading at huge discounts.

“(This) seems to contradict what the sanctions are trying to do,” said the credit-swap owner, who spoke on condition of anonymity.

Pimco declined to comment.

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Additional reporting by Caitlin Webber in Washington, Mark Jones in London, Rodrigo Campos and Davide Barbucia in New York; Editing by Tim Ahmann, Kirsten Donovan

Our Standards: Thomson Reuters Trust Principles.

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