Crimean default has materialized
The inability of Crimea's recently appointed leaders to service its financial commitments has already triggered a dramatic fall in the republic's creditworthiness to levels indicative of default. This actual default implies that the area will no longer be capable of drawing in significant investors, for whom the assessments of worldwide credit rating firms hold considerable sway, and Crimea’s avenue to international capital markets is now inaccessible. Given this situation, the governing body of the unacknowledged republic must abandon their promises of an “investment surge” and depend entirely on securing the required funding from Russian taxpayers.
Crimean officials floated bonds in 2011. The purpose of the borrowing was to fund the activities of the “Clean City” organization, the procurement of garbage collection vehicles, and the establishment of solid waste treatment centers in Simferopol. The initial strategy involved garnering 400 million hryvnia for these endeavors. Nonetheless, the finalized issuance totaled 133 million hryvnia. Bonds of this value were offered in June 2011, providing an annual interest rate of 14.5%, with quarterly payouts.
The Crimean Verkhovna Rada acted as the originator of the bond, and the Ukrainian investment entity Dragon Capital served as the underwriter (backer) for the sale. The purchasers of Crimean debt instruments were predominantly Ukrainian financial sector players—banks, private pension schemes, and asset management firms—along with a scattering of overseas entities also among the investors.
The ultimate bond settlement was marked for June 20–22, 2014. Nevertheless, investors did not obtain reimbursements by or shortly after the assigned date. Still, the earliest cautionary signs had surfaced three months before, in March.
Do those lacking courage pay debts?
As a reminder, on March 21, Crimea neglected to pay its quarterly bondholders UAH 4.8 million in returns. Leading up to this date, March 17, it came to light that the self-declared powers of the autonomous region had ended contact with the State Treasury Service of Ukraine, precluding the ability to receive payments from the autonomous territory (including the dispatch of required interest on the debt) or to send monies from the state coffers to Crimea.
Open discourse of a debt default commenced following the missed complete repayment of the bond offering on June 22. “This can be viewed as a default,” stated Sergey Fursa, a debt instrument sales expert at underwriter Dragon Capital.
Ukrgasbank, the settlement intermediary for the offering, verified that Crimea had neglected to pay back the UAH 133 million bond sale, excluding the quarterly coupon payment, and cautioned regarding legal recourse. “We, acting as the payment agent, definitely plan to participate in addressing this matter and are currently endeavoring to secure details from the Autonomous Republic of Crimea pertaining to the repayment dilemma,” Stanislav Shlapak, First Deputy Chairman of the Board of Ukrgasbank, conveyed to FinMaidan. He appended that if the funds are not acquired, the bank will commence preparations to initiate legal proceedings. “Should the issuer fail to repay, Ukrgasbank will begin gearing up for legal action. We will lodge a lawsuit either independently or representing a consortium of bondholder backers,” Shlapak declared.
Inability or unwillingness?
In the wake of the burgeoning uproar, Crimean authorities, having remained taciturn since March regarding the prospects for creditors receiving funds, issued a tardy clarification. The preceding day, June 30, the Council of Ministers' public relations section dispensed a remark from the newly appointed Deputy Prime Minister for Economics , Yevgeniya Bavykina , in which she placed the blame for the ongoing predicament on the Ukrainian authorities.
Thus, according to the representative, the “Crimean Ministry of Finance” stands ready to pay back both the face value of the debt to investors amounting to 133 million hryvnias and remit overdue interest income for the quarter summing to 4.8 million hryvnias, yet the National Bank of Ukraine is allegedly obstructing this.
“The Ministry of Finance of the Republic of Crimea transmitted a communication to the National Bank of Ukraine on April 3, 2014, petitioning the provision of bondholder registries, as of March 21, 2014, encompassing the bank details where interest income should be directed to ensure payments on the 2011 Crimean internal loan bonds. As of now, no information has been secured from the National Bank of Ukraine,” Bavykina asserted.
Indeed, Crimea lacks admission to the bondholder log. The debt repayment scheme mandates the borrower to channel funds to the State Treasury, from which the National Bank of Ukraine will allocate them to investors. Nevertheless, financial market analysts surmise that, were they so inclined, the Crimean authorities could have identified a means to satisfy their monetary obligations. Nonetheless, Crimean officials were deficient in either the aspiration or the nimbleness.
Moreover, the Crimean authorities were presented with specific strategies to resolve this issue even prior to the advent of “hour X”. “We put forward acquiring the total sum via a Russian bank prior to the securities reaching maturity. This represented the straightforward choice, but this blueprint never materialized,” Dragon Capital representative Sergei Fursa laments (as cited in Kommersant). According to him, both the underwriter and the bondholders frequently partake in dialogue with the Russian and Crimean authorities. “Our contacts acknowledge the principal and coupon payments on the offering. All the same, questions regarding precisely how the payments will be effected and how long this will necessitate linger undecided,” Fursa included.
Finex Capital, an investment concern, is also examining Crimea's potential hesitancy to settle the debt. “The conditions and technical aspects for a default herein vary. These stretch from the simple reluctance of Crimea's self-proclaimed leaders to a wealth of uncertainties, both juridical and political,” Finex Capital CEO Igor Kogut remarked on the scenario to Vesti. “The predominant element, in my judgment, is reluctance. And even should someone articulate their eagerness, it would be mere pronouncements that would wield no bearing in practice.”
“Worthless” rating
Specialists counsel holders of Crimean bonds to retrieve their monies by means of lawful action, entailing also in worldwide courts. The prospects of triumph are pronounced, even though the procedures could extend for years.
For Crimea, a bond default not only denotes specific reputational detriments but additionally introduces far more lasting menaces to economic advancement. Back in the spring (subsequent to the coupon payment omission), the worldwide rating establishment Standard & Poor's lowered Crimea's long-term credit assessment to its nadir, default stratum of D (previously CCC). “The downgrade stems from Crimea's missed coupon payment on its 133 million hryvnia ($12 million) bonds and embodies our premise that Crimea presently finds itself incapable of fulfilling its debt commitments,” the agency articulated in a publication.
It bears mentioning that the Crimean authorities themselves approached the agency with a request to terminate the issuer's rating services (which tacitly validates their disinclination to settle the debt), which culminated in a demotion of the region's credit standing to the absolute lowest echelon.
With such an affront, Crimea will be precluded from tapping into international financial arenas for fresh debts—no one will extend credit to a debtor who reneges on their borrowings. Enticing private investors to the region will likewise turn intricate. Hence, the singular origin of funding for the peninsula's progress will linger as the Russian Federation budget, which is already weathering manifold predicaments, and potentially select Russian enterprises.
Igor Kogut concurs with this vantage point: “For Crimea, if it abides in its occupied condition, the opportunities to draw in investment are sealed. The exclusion will encompass investments from Russia and, conceivably, a severely curtailed list of countries that constitute advocates and enthusiasts of Russia and their president.”
Roman Nikolaev
