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The “Big Package”: How Russia was driven to default

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© Reuters. FILE PHOTO: European Commission President Ursula von der Leyen arrives for the European Union leaders summit, as EU’s leaders attempt to agree on Russian oil sanctions in response to Russia’s invasion of Ukraine, in Brussels, Belgium May 30, 2022. REUTERS

By Marc Jones

LONDON (Reuters) – Russia’s first major international debt default in over a century, which Washington said became a fact on Monday, follows months of co-ordinated Western sanctions that left Moscow with cash but o access to the international financial network.

Below is a summary of the key moments that have led up to this point.

THE “BIG PACKAGE”

At around 11.30 p.m. (2230 GMT) on Feb. 25, the day after Russian troops entered Ukraine, European Union’s experts in Brussels said a set of sanctions they had worked on for days, or the “Big Package” as they called it, was ready.

Just before midnight, the European Commission announced https://www.consilium.europa.eu/en/press/press-releases/2022/02/25/russia-s-military-aggression-against-ukraine-eu-imposes-sanctions-against-president-putin-and-foreign-minister-lavrov-and-adopts-wide-ranging-individual-and-economic-sanctions the measures.

While emergency Group of Seven and EU meetings earlier made clear a response was coming, the package named Vladimir Putin and his to diplomat Sergey Lavrov personally, and, as it later became clear, froze some $300 billion of the Russian central bank’s reserves.

“That was really the moment when we said, okay, well we’ve done it,” one European source told Reuters. “That was, I think, a very pivotal moment for a lot of people around a table.”

EU’s Von der Leyen lays out Russia sanctions https://fingfx.thomsonreuters.com/gfx/mkt/dwvkrmloapm/Pasted%20image%201656346091349.png

SWIFT ACTION

Days later, on March 2, the EU struck again https://www.consilium.europa.eu/en/press/press-releases/2022/03/02/russia-s-military-aggression-against-ukraine-eu-bans-certain-russian-banks-from-swift-system-and-introduces-further-restrictions by banning seven Russian banks from SWIFT, an international financial messaging system crucial for cross-border transactions.

Booting Russian lenders from SWIFT had long been considered a ‘nuclear option,’ but the invasion put it on the table and when the EU decided to activate it, those at SWIFT headquarters just outside Brussels were ready.

The only question was how long they had to implement the move, “five days or five minutes?” another source said. In the end is was 10-12 days.

FIRST CUTS, BUT NOT THE DEEPEST

Credit rating agency, S&P Global (NYSE:SPGI), already stripped Moscow of its coveted investment grade rating on Feb. 26 and Russian bonds were slumping, but a heavier blow followed on March 15, when the EU told top credit agencies to stop rating Russian dept or risk losing their licenses to operate in the bloc.

“We were caught flat-footed, certainly we were not given any advanced warning,” one senior rating agency analyst said. “Basically the question was, does this mean we can’t rate Russia any more?” It turned out the answer was yes.

Driven to default Driven to default https://graphics.reuters.com/UKRAINE-CRISIS/RUSSIA-BONDS/mopanryzgva/chart.png

DEFAULT DEADLINE ONE

With so many hurdles being erected, expectations built that Russia would default on its first post-sanctions’ bond payments either on March 16, or a month later at the end of a 30-day “grace period.”

However, a special “waiver” in the U.S. sanctions granted by the Treasury’s Office of Foreign Assets Control allowed payments to go through.

UNINTENDED CONSEQUENCES

On April 8, a week before EU ban on Russian ratings was due to come into force, S&P declared Russia in “selective default” after Moscow said it planned to make upcoming bond payments in roubles rather than dollars, their issue currency.

On May 3 though, shortly before the payment was due, the Kremlin U-turned and paid in dollars.

SHOCK TO THE SYSTEM

Days later, Russia had stumbled, though.

On May 11, sharp-eyed creditors spotted that Moscow had failed to add $1.9 million of extra interest that had built up on bonds that only got paid in their grace periods rather than on time. They contacted the clearing house Euroclear and then bond market equivalent of an insurance payment arbiter – the Credit Derivative Determinations Committee https://www.cdsdeterminationscommittees.org/cds/the-russian-federation which ruled that a “credit event” had happened.

The sum was too small to trigger default clauses in all of Russia’s international bonds, but it did mean some investors expected to receive default insurance payments.

But when the U.S. Treasury clarified on its website that buying Russian bonds on the open, or ‘secondary’ market, was banned, that CDS insurance process had to be halted as it was no longer clear what to do with the bonds involved.

“It is a bit like if your house burns down and the insurance company turns around and claims it was the wrong kind of fire,” said Joe Delvaux, emerging markets distressed debt portfolio manager at Europe’s largest fund manager Amundi. “The reality is that these sanctions are a shock to the system.”

INTENDED CONSEQUENCES

The step that made Russia’s default unavoidable though was Washington’s May 24 decision to let the waiver that had allowed U.S. bondholders receive Russia’s payments, expire.

A week later, the EU also sanctioned Russia’s domestic paying agent, its National Settlement Depository (NSD), which it had been using to make the payments.

Moscow has blamed the West for forcing an “artificial default”., with its finance minister Anton Siluanov calling the situation a “farce.”

However, veteran global policymakers involved in the process say they sanctions are unprecedented but fully justified.

“They were very significant actions that responded to the magnitude of the actions that Russia undertook,” Agustin Carstens, the head of the world’s central bank umbrella body, the Bank for International Settlements, said.

Biden stresses power of U.S. sanctions https://fingfx.thomsonreuters.com/gfx/mkt/zjvqkloyovx/Pasted%20image%201656321187075.png

Forex

The US dollar rate today is stable against the euro, rising against the yen

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us dollar rate today

The US dollar rate today is stable against the euro, rising against the yen and weakly rising against the pound. The market is waiting for the publication of the Federal Reserve’s (Fed) July meeting minutes.

The Fed will release the minutes of the Federal Open Market Committee (FOMC) meeting on Wednesday, July 26-27.

Fed Chairman Jerome Powell said during a news conference following the July meeting that the U.S. Central Bank may slow the pace of increases in the base interest rate, and the minutes may give the same signal, according to a currency market analyst at MUFG Bank Sophia Ng, whose opinion leads to Dow Jones. This will confirm market participants in the opinion that the Fed will raise the rate by less than 75 basis points in September, the expert said.

Dollar rate chart

The euro/dollar pair is trading at $1.0169, compared to $1.0171 at the close of the previous session.

The U.S. currency went up by 0.26% to 134.55 yen against 134.22 yen in Monday trading. The pound grew by 0.12% to $1.2111 from $1.2096 a day earlier.

The index, calculated by ICE, which shows the dollar trend against six currencies (euro, Swiss franc, yen, Canadian dollar, pound and Swedish krona), lost 0.13%, while the broader WSJ Dollar Index – 0.07%.

As of Tuesday’s trading results, the dollar fell 0.14% against the euro and 0.37% against the pound, while strengthening 0.68% against the yen.

Earlier we reported that the quarterly GDP growth estimate for the euro zone had worsened to 0.6%

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Is the EU economy growing? Quarterly GDP growth estimate for the eurozone worsened to 0.6%

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Eurozone gdp growth 2022

Is the EU economy growing? Quarterly estimate of eurozone GDP growth worsened to 0.6%Eurozone GDP growth quarterly estimate worsened to 0.6%In the 2nd quarter, the economy of 19 eurozone countries increased by 0.6% compared with the previous quarter, according to the revised data of the EU Statutory Administration.

Thus, the indicator was worsened from the preliminary estimate of 0.7%.

Eurozone gdp growth 2022

Analysts on average did not expect a revision from the previously announced level, according to Trading Economics. On an annualized basis, eurozone GDP grew by 3.9% in April-June, rather than 4% as previously reported. Experts also did not forecast a revision of this indicator.

Among the largest economies of the region, the GDP of Spain increased by 1.1% in quarterly terms. Italy – by 1%. France – by 0.5%. Meanwhile, the German economy remained unchanged from the first quarter, while the GDP of Portugal, Lithuania and Latvia decreased by 0.2%, 0.4% and 1.4% respectively.

In Q1 this year, eurozone GDP growth was 0.5% quarter-on-quarter and 5.4% year-on-year. This is the second of three estimates of quarterly economic growth in the currency bloc. The final data will be published on September 7. The quarterly GDP growth estimate for the euro area has been downgraded to 0.6%. 

Earlier we talked about crude oil price forecast for 2022.

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Crude oil price forecast 2022: WTI in free fall amid global turmoil

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crude oil price forecast 2022

Crude oil prices are in free-fall at the beginning of the week, with a barrel of West Texas Intermediate currently trading at $86.63, not far from this month’s low of $86.40. What is the crude oil price forecast for 2022? 

Several factors are affecting oil prices, the main one being the worsening demand outlook. Data from China showed that in July, the country’s crude oil transshipment fell to its lowest level since March 2020, at 53.21 million tons of crude oil. This figure was also 8.8% lower than in the same period last year. Also, disappointing data on retail sales and industrial production in China revived fears of a global recession.

Crude oil price forecast chart – what affects the forecast? 

On the supply side, Saudi Aramco’s CEO said Sunday that they could increase production to a maximum capacity of 12 million barrels per day if the government demanded it. Looking ahead, Iran’s response to the EU’s proposal to reopen the 2015 nuclear deal, which is expected to be announced later in the day, could affect crude oil prices. Should Iran and the U.S. reach an agreement, it could lead to the lifting of sanctions on oil and gas exports from Iran.

The aforementioned August low is WTI’s lowest level since February, which means that a break below it could lead to a sharper drop. The initial bearish target and immediate support level is the $86.10 area, where the black gold has several intraday highs and lows since January of this year. A bearish breakout could lead to a test of the $85.00 level. The sour tone in stocks will likely keep crude oil prices in a downtrend for the rest of the day.

If Wall Street recovers, WTI could also find some demand. Intraday resistance is at the $88.50 and $90.00 levels. Nevertheless, technical indicators suggest that oil prices will be declining in the near term, adding to the negative fundamental picture.

Earlier we reported that the dollar is rising against the euro and the pound

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