The US Treasury gave the green light to Russian defaulted insurance payments


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

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WASHINGTON, Jul 22 (Reuters) – The US Treasury issued a special permit on Friday allowing investors hedged against a Russian default, known as credit default swaps, to receive their payouts.

The normally simple process of paying CDS turned into chaos in June when Washington said its sanctions on Russia amounted to a blanket ban on buying Moscow’s debt. read more

An investor who buys a CDS contract typically transfers the underlying bond to the bank or fund that sold the CDS to him when a default occurs. Traditionally, it involves an auction to determine the price, but due to sanctions, this exchange has effectively become illegal.

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The license allows US citizens to buy or receive Russian bonds two days before the announced date of the auction and up to eight business days after the auction.

The committee that sets the date for the auction is scheduled to meet Monday at 13:00 GMT, after meeting three times this week.

“The Office of Foreign Assets Control (OFAC) has issued two general licenses (waivers) to help U.S. and other global investors more carefully exit their exposure to Russia,” a Treasury official said, referring to the Office of Foreign Assets Control. foreign assets that enforces US sanctions.

The move also empowers financial institutions to “facilitate, clear and settle” newly authorized transactions, the Treasury’s website says.

Analysts have calculated that CDS on Russia’s sovereign debt of approximately $2.5 billion has been delayed due to the problems.

“This is an example of the fine-tuning of the sanctions apparatus, in which the United States has gained significant experience over the years,” said Jamal El-Hindi, an adviser to the law firm Clifford Chance.

“Special licences, general licences, are used to make sure the overall impact of the sanctions is on what they want and not blocking what they don’t want to block,” he said.

Russia was declared in default last month, though it had already stumbled in May by not paying an additional $1.9 million in interest it had accumulated on a previously late payment as Western sanctions cut off payment channels.

The confusion led investors to lobby in Washington for Friday’s permit, which was issued along with another “license” allowing until October 19 to wind down transactions in securities issued by Russian entities in accordance with agreements concluded before June 6.

“The Treasury that granted the license acted wisely and is helping to fulfill the goals of CDS and the reason why investment in CDS exists,” said Jay Auslander, partner at the law firm Wilk Auslander.

“From a financial standpoint, this is good news and we were hoping to see it.”

However, the Russian CDS holder said that these contracts could have been settled without the bonds changing hands, and that the rejection could end up in favor of insurance sellers such as US investment firm PIMCO, which owns a significant portion of these contracts. .

The Treasury Department’s license effectively allows US companies to buy Russian debt if the purchase is needed to pay insurance premiums, meaning firms like PIMCO can remain long the country’s bonds, which are currently trading at a huge discount.

“(This) seems to contradict what the sanctions are trying to do,” the CDS owner said, speaking on condition of anonymity.

PIMCO declined to comment.

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

Our Standards: Thomson Reuters Trust Principles.

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