Moody’s, S&P say By Reuters

By Elena Fabrichnaya, Alexander Marrow and Darya Korsunskaya

MOSCOW (Reuters) – Countries whose sovereign bonds were purchased by Russia would not be considered in default if Western governments decide to confiscate frozen Russian reserves worth $300 billion, credit rating agencies Moody’s (NYSE:) and S&P Global said.

U.S. and British officials are pushing to seize Moscow’s assets immobilised in Belgium and other European countries. They are looking to secure wider Group of Seven (G7) backing for the move at talks next month close to the second anniversary of the launch of Russia’s “special military operation” in Ukraine.

Back in June 2022, the United States and Moody’s deemed Russia to have defaulted on its bonds when international sanctions prevented Moscow from making payments to bondholders – an interpretation which Moscow rejected.

The Russian central bank argues France, Germany, Britain and other sovereigns would likewise be in default if bonds held by Russia were confiscated and Russia therefore did not receive due payments, a person familiar with its view told Reuters.

But Moody’s said its interpretation was different.

“Our ratings do not typically reflect holder-specific considerations hence we would not treat the scenario as a default for these countries,” Thorsten Nestmann, Senior Vice President at Moody’s Investors Service, said by email in response to a Reuters inquiry.

Frank Gill, Sector Lead EMEA Sovereign Ratings at S&P Global, also told Reuters it would not be likely to be considered a default as interest payments are made via a payment agent which would continue to disburse them to other creditors.

Most of Russia’s frozen reserves are held in cash and the sovereign bonds of France, Germany, Britain, Austria and Canada.

The rating agencies’ interpretation may allay concerns around default risk. Some European officials also fear any asset confiscation could set a worrying precedent that sees other countries seek compensation for past military action by Western countries.

Andrei Ryabinin, a partner at Russian law firm Delcredere, said he was almost certain that a failure to fulfil obligations in these circumstances would not constitute a default as the prospectuses most likely provide for exceptions when sanctions come into play.

Rival ratings agency Fitch declined to comment on its own position.

‘WE’RE GOING TO FIGHT’

Russian authorities privately lean towards the view that the reserves are all but lost, but are determined to mount a legal challenge and retaliate strongly, according to four people familiar with the government and central bank’s thinking.

“Deep down, everyone has already said goodbye to the reserves,” one of those sources said. “There will certainly be (a legal process). It is a kind of ritual. We will not roll over, we’re going to fight.”

A second source said Russia had “bid farewell” to the assets, certain that European capitals would succumb to U.S. pressure.

A third agreed Russia was unlikely to be able to prevent the confiscation but would threaten retaliation such as confiscating Western assets trapped in Russia and breaking off diplomatic relations with foreign powers deemed unfriendly.

Russia’s foreign ministry has called the plan to confiscate its assets to help rebuild Ukraine “21st century piracy” and said Moscow would retaliate harshly. The Kremlin said Europe would face “inevitable” legal consequences.

Another source familiar with the Russian position said any trial would likely last for several years. As the reserves are held by Russia’s independent central bank, Moscow can argue the funds are not government property, the person added.

It was not immediately clear in which jurisdiction Russia may choose to fight its case but Vladimir Pestrikov, a partner at Moscow-based law firm Rybalkin, Gortsunyan, Dyakin and Partners said it could elect for a challenge in the EU court.

“The central bank may potentially seek interim measures from the EU court aimed at keeping its assets on the frozen accounts until its action is resolved,” Pestrikov said.