Karin Strohecker, Sujata Ro

LONDON (Reuters – Russia moved closer to a historical debt default Wednesday as the United States ruled not to extend a key license that allowed Moscow, despite US sanctions for it attacking Ukraine, to pay bondholders.

Russia is now on track for its first serious default in more than a century on international sovereign bonds after the license was revoked at 12:00 ET (0401 GMT).

These are your questions and answers about what could happen next.

WHAT IS CHANGED

On March 2, the U.S. Office of Foreign Assets Control issued an OFAC license that allowed U.S. entities to conduct transactions with Russia’s financial ministry, central bank, or national wealth funds in connection to debt payments.

Because of this, Russia was able to maintain interest and maturity payments on its sovereign bonds. This was despite a wide range of restrictions regarding dealing with Russian entities. It has made seven payments on dollar-denominated bonds since February 22.

The Treasury Department announced late Tuesday that it will not renew the license. Its action will directly impact only U.S. bondholders. However, holders from other countries may find it difficult to accept Russian payments due the U.S. supremacy of the global financial market.

HOW MUCH DEBT IS AFFECTED

Russia currently has approximately $40 billion worth of international bonds, and just over $2 billion left in debt servicing for external creditors until the end of this year.

It can be broken down into two tiers. The first is legacy bonds that are settled overseas in the traditional manner. Second, are those issued after Moscow annexed Crimea 2014 and are settled at Russia’s National Settlement Depositary (NSD). These have alternate hard-currency payment provisions.

This last category includes debt that was sold after 2018, which is also settled at the NSD, but has provisions to be paid in roubles.

WHEN WILL FAULT HAPPEN

Interest payments in the amount of $71.25million and 26.5m euros ($28 million), are due for two bonds on May 27. Russia started the payment process last week to meet the OFAC deadline.

Russia’s NSD, the agent for payment on the bonds, announced that it had received the funds and will pay the foreign currency payments on May 27.

Both bonds’ prospectus states that the Principal and Interest (including additional amounts) of Global Bonds registered as NSD are payable to NSD, in its capacity of registered holder.

Analysts and Russia’s Finance Ministry see it as the fulfillment of the payment.

But it’s not certain if the money will reach bondholders accounts. A default can be defined as funds not appearing in the accounts of creditors.

According to creditors, the payment due Wednesday 27th May has not yet arrived in their accounts. Russia still has 30 days to pay after May 27.

What are the NEXT PAYMENTS?

Russia is responsible for payments to two bonds, one in June 23rd and the other in June 24, if creditors receive May 27, payments.

Similar to the May 27, the June 23 payments will be due for bonds settled at NSD.

The $159 million payment is due for a 1998 bond. Analysts believe Russia won’t be able make the payment without the Treasury licence because this issue cannot be settled off-shore.

The bond has a grace period that lasts 15 days.

Will CREDIT Deficit Swaps be TRIGGERED

It is unclear if a non-payment could trigger a payout on creditdefault swaps (CDS), which investors use in order to insure their exposures to certain risks. In this instance, Russia defaulting on its sovereign loans.

The task of determining whether there has been a credit event is the responsibility of a committee made up major asset managers and banks. This can lead to a payout.

JPMorgan (NYSE 🙂 believes that CDS holders will not be able to settle bonds in Russia that are not unable to be paid at the NSD.

JPMorgan analyst said that even if the payment does not get transferred to bondholders later, it may still be sufficient to prevent a CDS trigger.

If Russia does not pay the June 24 payment, CDS may be activated once the grace period ends.

JPMorgan calculates that the current net notional CDS are worth $2.54 Billion in Russia. That includes the $1.68B on Russia and the remaining CDX.EM.