Finance

Take a look at some of the biggest movers in the premarket:
Nike (NKE) – Nike fell 2.4% in premarket trading despite reporting better-than-expected quarterly profit and revenue. The athletic apparel and footwear maker forecast current-quarter revenue below analysts’ estimates amid increased promotional activity and ongoing disruptions in its profitable Chia market.

Spirit Airlines (SAVE) – Spirit added 4% in the premarket as the battle to buy the airline intensifies. JetBlue (JBLU) responded to Frontier Group’s (ULCC) latest improved offer by sweetening its own bid, adding a monthly pre-payment of 10 cents per share between January 2023 and the deal’s close, as well as a $50 million breakup fee increase to $400 million and a $2.50 per share payment when the deal is approved. Frontier rose 2.7%, while JetBlue edged lower by 0.3%.
Morgan Stanley (MS), Goldman Sachs (GS), Bank of America (BAC), Wells Fargo (WFC) – These banks raised their dividends after passing their annual stress tests, but JPMorgan Chase (JPM) and Citigroup (C) kept their payouts flat. Morgan Stanley gained 3.3% in premarket action, Goldman rose 1.7%, Bank of America added 1.1% and Wells Fargo gained 0.7%.
Occidental Petroleum (OXY) – Occidental Petroleum gained 4% in premarket trading after Berkshire Hathaway (BRK.B) revealed additional purchases of Occidental Petroleum shares, increasing its stake to 16.4%.
Robinhood Markets (HOOD) – Robinhood fell 3.7% in premarket action after FTX CEO Sam Bankman-Fried threw cold water on a Bloomberg report that FTX might be interested in buying the trading platform company. Bankman-Fried told CNBC that although he is impressed by Robinhood and has been excited about potential partnerships, there are no active M&A talks taking place.
Jefferies Financial (JEF) – Jefferies slid 4.4% in the premarket after quarterly profit fell short of analysts’ forecasts, although the investment firm’s revenue did exceed estimates. Revenue was down 30% from a year ago amid what Jefferies calls a “challenging” capital markets environment.

Las Vegas Sands (LVS), Wynn Resorts (WYNN) – Shares of the casino operators moved higher in the premarket as China eased Covid-19 quarantine rules for international arrivals. Las Vegas Sands rallied 6.3%, while Wynn Resorts jumped 6.5%.
Playtika (PLTK) – The Israel-based mobile game developer saw its shares rise 3.2% in premarket trading following an Axios report that Joffre Capital was buying a majority stake.
Roivant Sciences (ROIV) – Shares of the biopharmaceutical company jumped 7.9% in the premarket after it unveiled a new biotech company called Priovant Therapeutics in partnership with Pfizer (PFE). Pfizer will hold a 25% stake in Priovant, which will focus on novel therapies for autoimmune diseases.
Snowflake (SNOW) – Snowflake gained 3.4% in premarket action after Jefferies upgraded the cloud computing company’s stock to “buy” from “hold.” Jefferies likes Snowflake’s growth potential and noted its “rock solid” fundamentals and “near flawless” execution. Snowflake had gained more than 32% during a five-session win streak before retreating 2.2% yesterday.

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Venture capitalists are betting a new breed of startups from Europe will be the real winners in the crowded “buy now, pay later” space.
Firms like Mondu, Hokodo and Billie have raked in heaps of cash with the pitch that businesses, not consumers, are a more lucrative clientele.
Valuations of consumer-focused BNPL players like Klarna and Affirm have fallen sharply amid concerns about a potential recession.

Klarna is in talks to raise funds at a sharp discount to its last valuation, according to a report from the Wall Street Journal. A spokesperson for the firm said it doesn’t comment on “speculation.”
Jakub Porzycki | NurPhoto via Getty Images

With hype over the “buy now, pay later” trend fading, some investors are betting they’ve found the next big thing.
Buy now, pay later companies like Klarna and Affirm, which let shoppers defer payments to a later date or break up purchases into interest-free installments, are under immense strain as consumers become more wary about spending due to the rising cost of living, and as higher interest rates push up borrowing costs. They’re also facing increased competition, with tech giant Apple entering the ring with its own BNPL offering.

But venture capitalists are betting a new breed of startups from Europe will be the real winners in the space. Companies like Mondu, Hokodo and Billie have raked in heaps of cash from investors with a simple pitch: businesses — not consumers — are a more lucrative clientele for the buy now, pay later trend.
“There’s a big opportunity out there with regards to ‘buy now, pay later’ for the B2B [business-to-business] space,” said Malte Huffman, co-CEO of Mondu, a Berlin-based startup.
Huffman, whose firm recently raised $43 million in funding from investors including Silicon Valley billionaire Peter Thiel’s Valar Ventures, predicts the market for BNPL in B2B transactions in Europe and the U.S. will reach $200 billion over the next few years.
Whereas services like Klarna extend credit for consumer purchases — say, a new pair of jeans or a flashy speaker system — B2B BNPL firms aim to settle transactions between businesses. It’s different to some other existing forms of short-term finance like working capital loans, which cover firms’ everyday operational costs, and invoice factoring, where a company sells all or part of a bill for faster access to cash they’re owed.

A new generation of BNPL startups

COUNTRY
TOTAL VC FUNDING RAISED

Scalapay
Italy
$727.5M

Billie
Germany
$146M

Playter
United Kingdom
$58.4M

Hokodo
United Kingdom
$56.9M

Mondu
Germany
$56.9M

Treyd
Sweden
$12.3M

Source: Crunchbase

Patrick Norris, a general partner at private equity firm Notion Capital, said the market for B2B BNPL was “much bigger” than that of business-to-consumer, or B2C. Notion recently led a $40 million investment in Hokodo, a B2B BNPL firm based in the U.K.

“The average basket size in B2B is much larger than the average consumer basket,” Norris said, adding this makes it easier for firms to generate revenue and achieve scale.

‘B2C’ players falter

Shares of major consumer-focused BNPL players have fallen sharply in 2022 as concerns about a potential recession weigh on the sector.
Sweden’s Klarna is in talks to raise funds at a sharp discount to its last valuation, according to a report from the Wall Street Journal  — down to $15 billion from $46 billion in 2021. A Klarna spokesperson said the firm doesn’t comment on “speculation.”
Stateside, publicly-listed fintech Affirm has seen its stock plunge more than 75% since the start of the year, while shares of Block, which purchased Australian BNPL firm Afterpay for $29 billion, have fallen 57%. PayPal, which offers its own installment loans feature, is down 60% year-to-date.
BNPL took off in the coronavirus pandemic, offering shoppers a convenient way to split payments into smaller chunks with just a few clicks at retailers’ checkout pages. Now, businesses are getting in on the trend.
“Businesses are still facing cash flow issues in light of worsening macroeconomic conditions and the ongoing supply chain crisis, so any way of receiving money faster on a flexible basis is going to appeal,” said Philip Benton, fintech analyst at market research firm Omdia.

Mondu and Hodoko haven’t disclosed their valuations publicly, but Scalapay and Billie, two B2B BNPL firms from Italy, were last valued at $1 billion and $640 million, respectively.
BNPL services are proving especially popular with small and medium-sized enterprises, which are also feeling the pinch from rising inflation. SMEs have long been “underserved” by big banks, according to Mondu chief Huffman.
“Banks cannot really go down in ticket size to make it economical because the contribution margin they would get with such a loan doesn’t cover the associated costs,” he said. 
“At the same time, fintech companies have proven that a more data-driven approach and a more automated approach to credit can actually make it work and expand the addressable market.”

Recession risk

BNPL products have been met with pushback from some regulators due to fears that they may be pushing people to get into debt that they can’t afford, as well as a lack of transparency around late payment fees and other charges.

The U.K. has led the charge on the regulatory front, with government officials hoping to bring in stricter rules for the sector as early as 2023. Still, Norris said business-focused BNPL companies face less regulatory risk than firms like Klarna.
“Regulation in B2C is going to offer much needed protection to consumers and help them to shop smart and stay out of debt,” he said. “In B2B, the risk of businesses overspending on items they don’t need is negligible.”
One thing the B2B players will need to be wary of, however, is the level of risk they’re taking on. With a possible recession on the horizon, a big challenge for B2B BNPL startups will be sustaining high growth while also preparing for potential insolvencies, Norris said.
“B2B will generally be high value, low volume so naturally the risk appetite will be higher and affordability checks more important,” Omdia’s Benton said.

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Stock futures rose slightly in overnight trading Monday following a losing day as investors prepare to rebalance their portfolios with the end of the quarter fast approaching.
Futures on the Dow Jones Industrial Average gained 36 points. S&P 500 futures edged up 0.2% and Nasdaq 100 futures rose 0.3%.

The overnight action followed modest losses on Wall Street as a comeback rally stalled. The blue-chip Dow fell about 60 points, while the broader benchmark, the S&P 500, dipped 0.3% and the tech-heavy Nasdaq Composite lost 0.7%. The major averages rallied last week, posting their first positive week since May.
“Market bulls who have had the rug repeatedly pulled out from under them this year may understandably be suspect of the rally, since many of 2022’s upswings have quickly given way to fresh lows and this time may be no different,” said Chris Larkin, managing director of trading at E-Trade.
Investors will monitor more data on Tuesday including June consumer confidence and April home prices to gauge the health of the economy. Fears of a recession have increased lately as the Federal Reserve tries to combat surging inflation with aggressive rate hikes.
Shares of Nike edged higher in post-market trading after the sportswear company topped Wall Street’s earnings and sales expectations for the fiscal fourth-quarter despite a Covid lockdown in China and a tougher climate for consumers in the U.S.

Stock picks and investing trends from CNBC Pro:

Several major banks raised their dividends in response to successfully clearing this year’s Federal Reserve stress tests, including Bank of America, Morgan Stanley and Goldman Sachs. JPMorgan and Citigroup, however, said increasingly stringent capital requirements forced them to keep their dividends unchanged.

Despite last week’s bounce, the S&P 500 is down nearly 14% in the second quarter, on track to post its worst quarter since the first quarter of 2020, at the depth of the pandemic.
“The bounce from the bear market lows is a welcome change, though slowing economic growth and lack of capitulation among investors has many skeptical of the durability of the recovery,” said Mark Hackett, Nationwide’s chief of investment research.

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JPMorgan Chase and Citigroup said Monday that increasingly stringent capital requirements forced the firms to keep their dividend unchanged while rivals announced bumps to their quarterly payouts.
Bank of America said that it was raising its quarterly dividend by 5% to 22 cents per share. Morgan Stanley said it was raising the payout 11% to 77.5 cents per share.
Wells Fargo boosted its dividend 20% to 30 cents a share. Goldman Sachs appeared to have one of the larger dividend increases, a 25% bump to $2.50 per share.

A combination file photo shows Wells Fargo, Citibank, Morgan Stanley, JPMorgan Chase, Bank of America and Goldman Sachs.

JPMorgan Chase and Citigroup said Monday that increasingly stringent capital requirements forced the firms to keep their dividend unchanged while rivals announced bumps to their quarterly payouts.
Bank of America said that it was raising its quarterly dividend by 5% to 22 cents per share. Morgan Stanley said it was raising the payout 11% to 77.5 cents per share. Wells Fargo boosted its dividend 20% to 30 cents a share.

Goldman Sachs appeared to have one of the larger dividend increases, a 25% bump to $2.50 per share. Last week, analysts had highlighted Goldman’s results, saying that it was a surprise winner of the Federal Reserve’s annual stress tests and that it would have more capital flexibility as a result.

While all 34 banks involved in the regulatory exercise passed last week, analysts focused on the biggest American banks including JPMorgan, saying that an unexpected rise in stress capital buffers would mean they might have to keep dividends flat and scale back or even eliminate share buybacks.
JPMorgan confirmed some of those fears on Monday, saying that “higher future capital requirements” are the reason it intends to keep its quarterly dividend frozen at $1 per share. Minutes later, Citigroup disclosed that it was keeping its quarterly payout at 51 cents.
“We will continue to use our capital to invest in and grow our market-leading businesses, pay a sustainable dividend and we will retain capital to fully satisfy our future regulatory requirements,” JPMorgan CEO Jamie Dimon said in the release. He added that the Fed exams showed that the industry could serve as a “source of strength for the broader economy” during times of tumult.
But the worst of investors’ concerns appear to have gone unrealized. Morgan Stanley banking analyst Betsy Graseck had warned on Friday that JPMorgan and Citigroup may have to drop share repurchases altogether to stay comfortably above the new required capital levels.

In April, JPMorgan announced a new $30 billion stock repurchase plan that began May 1.
When asked if that plan was still intact, a JPMorgan spokeswoman said that the bank “continues to have board authorization for buybacks.”
Overall, the dividend increases this year paled in comparison to last year’s action. Morgan Stanley doubled its dividend after the 2021 stress test.
Shares of JPMorgan, Bank of America, Citigroup and Wells Fargo were roughly unchanged in trading after the close of regular markets in New York, while Morgan Stanley rose 3.3% and Goldman advanced 1.7%.

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Monitors display Coinbase signage during the company’s initial public offering (IPO) at the Nasdaq MarketSite in New York, U.S., on Wednesday, April 14, 2021.
Michael Nagle | Bloomberg | Getty Images

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Brookfield Asset Management announced last week that it raised a record $15 billion for its inaugural Global Transition Fund. This marks the world’s largest private fund dedicated to the net zero transition, signaling that investors are still committed to establishing cleaner portfolios. 

However, some blame the trend toward ESG-investing for high energy inflation. Critics say the focus on clean energy has curbed investment in fossil fuels, which may have otherwise helped boost supply. 
Mark Carney, co-head of Brookfield’s Global Transition Fund, says he does not subscribe to this critique. Carney sat down with CNBC’s Delivering Alpha newsletter at last week’s SuperReturn International conference in Berlin where he explained what’s driving inflation in gas prices and energy costs and weighed in on the state of U.S. monetary policy. 
 (The below has been edited for length and clarity. See above for full video.)
Leslie Picker: I want to pick your brain on kind of your central banker – if you can put that hat on for me, because there are so many crosscurrents right now. And I want to just first get your take on the US specifically, because that’s where the bulk of our audience is. Is a soft planning still on the table? Or do you think the hard decisions need to be made, and it likely may mean some more pain ahead? 
Mark Carney: It’s a very narrow path in order for the U.S. economy to grow all the way through this. Unemployment has to increase. Financial conditions have already tightened a fair bit, I think they’re going to tighten a bit more, as well. And look, there’s also some pretty big headwinds from the world. China’s effectively in recession, or here in Europe, they’re on the cusp of a negative quarter because of the war and other factors. So, the U.S. economy is strong, it’s robust and flexible, the households are flexible, lots of positives here. But in order to thread the needle, it’s going to be tough.

Picker: Do you think 75 basis points is enough?
Carney: It’s certainly not enough to bring inflation back down and the economy back into balance, which is why what they imply about where policy is going, not just at the end of the year, but where it needs to rest in the medium term is going to be important.
Picker: Do you think that the Fed has lost the faith of investors, that investors now see them as being behind the curve in getting this under control?
Carney: I think the Fed itself and Chair Powell has acknowledged that, maybe they should have started earlier, recognizing that inflation wasn’t transitory. Those are all different ways that we can call it behind the curtain, they’ve acknowledged that. I think what the Fed is looking to do, and where they will retain investor support, is if it’s clear that they’re going to get a handle on inflation, they’re going to get ahead of this, that they don’t think that they can bring inflation down to target by just small adjustments in interest rates. The words and what chair Powell has been saying, what Jay’s been saying, in recent weeks and months, [they’re] establishing more firmly that they’re going to do their job on inflation because they recognize by doing that in the near term, it’s better for the U.S. economy, better for jobs in the medium term.
Picker: One of the factors that people have been highlighting in response to all the inflation that we’re seeing in the environment is this move toward ESG and this focus on renewables and disinvestment from fossil fuels. There are certain critics out there who believe that if we had focused more on that type of investment that we may not have the same kind of inflationary environment that we’re having, at least, in gas prices and energy costs and things like that. Based on what you’re seeing on the ground, is that actually the case? Is that critique or reality or is that just a talking point that people use?
Carney: No, I disagree with the critique. I think it’s something we’ve got to be conscious of going forward. And we’ll come back to that…we’re at the sharp end of the financial market, private equity world, and the debt world, and look, they got burned in U.S. shale in 2014-2015. No capital discipline in that sector. Destroyed a lot of value, and they withheld capital from shale, which was the marginal barrel of oil. Because of that, because of old fashioned capital discipline. And that’s what happened. That’s part of what got things so tight. Second point is the industry, as a whole, did not really invest or didn’t add barrels during COVID, like many other industries, didn’t add barrels during COVID and has been caught out by this resurgence of demand. Now, your question, though, is an important one going forward because we need to have sufficient investment in fossil fuels for the transition while there’s a significant ramp up in clean energy. So, the answer isn’t no investment in fossil fuels, and it is not the reason why gas prices are where they are. Unfortunately, it’s a combination of what happened over the course of the last five years, the reasons I just explained, and also, quite frankly, because there’s a war going on.
Picker: And that’s why you’re overseeing the energy transition strategy, not a clean energy strategy. 
Carney: Brookfield is huge in clean energy. We’ve got 21 gigawatts existing, we’ve got 60 gigawatts in the pipeline all around the world. So, we’re very active in that. But what we’re focusing on just as much is going to where the emissions are, and getting capital to steelmakers, to auto companies, to people in utilities, people in the energy sector so that they can make the investments to get their emissions down. That’s where you find a huge amount of value, returns for our investors – ultimately, pensioners, teachers, fire, firefighters, others, pensioners around the world – that’s where we create value for them. You also do good by the environment because you get emissions actually down across the economy and that’s what we need.
Picker: And is that also the same goal with the Net Zero Asset Managers initiative? I think it’s $130 trillion worth of AUM behind this idea of having a net zero portfolio by 2050. 
Carney: Yeah, and it’s very much about transition. So again, yes, a lot of it’s going to go to clean energy. I mean, clean energy needs are about $3 trillion a year. So, this is a huge investment opportunity, but again, going to where the emissions are, getting those down and helping to wind down emissions in sectors that aren’t going to run to their whole economic life. Look, we’re here in Europe, we’re here in Germany. Germany has put out a number of things. So, they’re going to have a clean energy system by 2035. They’re going to accelerate the approval process for these projects from six years to one year. They’re putting legislation in place across Europe. They’re tripling the pace of solar, they’re quadrupling the pace of hydrogen all this decade. Huge opportunity here in Europe, that’s being replicated elsewhere. But what comes with that is industrial decarbonization, if I can put it that way, and so Brookfield can play on both sides on the clean energy, but again, really going from everyone from tech to automakers to steel, to helping those companies move. 
Picker: Interesting, because it’s industrial emissions that are the biggest chunk of the pie, not necessarily how you drive your car. 
Carney: Well, yeah, it’s industrial emissions. Some of it is some of its autos, but some commercial real estate. We’re big in commercial real estate, we [have] got to get that down as a whole. And what this does is provide – we were talking moments ago about the macro economy, there’s some challenges with inflation. There’s actually some big positives with the scale of investment that’s required right at the heart of this economy. If I were to roll back the clock 25 years, the level of investment was about two percentage points higher around the world relative to GDP. Actually, we’re going to get that back through this process of transition that has big multipliers for growth and of course for jobs. More

Broad-based job cuts loom at major banks for the first time since 2019, thanks to a confluence of factors that have cast a pall over markets and caused most deal categories to plunge this year, industry sources said.
The math is ominous: Headcount at JPMorgan’s investment bank, Goldman Sachs and Morgan Stanley jumped by 13%, 17% and 26%, respectively, in the past two years amid a hiring binge. Meanwhile, capital markets revenue has fallen off a cliff.
“When banks have a revenue problem, they’re left with one way to respond,” said one Wall Street recruiter. “That’s by ripping out costs.”

People walk by the New York Stock Exchange.
Spencer Platt | Getty Images News | Getty Images

Less than six months ago, Wall Street bankers were reaping the rewards from a historic boom in mergers and IPOs.
Now, thanks to a confluence of factors that have cast a pall over markets and caused most deal categories to plunge this year, broad-based job cuts loom for the first time since 2019, according to industry sources.

The turnaround illustrates the feast-or-famine nature of Wall Street advisory work. Firms were caught understaffed when central banks unleashed trillions of dollars in support for markets at the start of the Covid-19 pandemic. The ensuing surge in capital markets activity such as public listings led to a bull market for Wall Street talent, from 22-year-old college graduates to richly compensated rainmakers.
For the first time in years, bank employees seemed to gain the upper hand. They pushed back against return-to-office mandates. They received record bonuses, multiple rounds of raises, protected time away from work and even Peloton bicycles.
But that’s over, according to those who place bankers and traders at Wall Street firms.
“I can’t see a situation where banks don’t do RIFs in the second half of the year,” David McCormack, head of recruitment firm DMC Partners, said in a phone interview. The word “RIF” is industry jargon meaning a “reduction in force,” or layoffs.

‘Very challenging’

The industry is limping into the traditionally slower summer months, squeezed by steep declines in financial assets, uncertainty caused by the Ukraine war and central banks’ moves to combat inflation.

IPO volumes have dropped a staggering 91% in the U.S. from a year earlier, according to Dealogic data. Companies are unwilling or unable to issue stock or bonds, leading to steep declines in equity and debt capital markets revenues, especially in high yield, where volumes have fallen 75%. They’re also less likely to make acquisitions, leading to a 30% drop in deals volume so far this year.
Wall Street’s top executives have acknowledged the slowdown.
Last month, JPMorgan Chase President Daniel Pinto said bankers face a “very, very challenging environment” and that their fees were headed for a 45% second-quarter decline. His boss, CEO Jamie Dimon, warned investors this month that an economic “hurricane” was on its way, saying that the bank was bracing itself for volatile markets.

Daniel Pinto, JPMorgan’s chief executive of corporate and investment bank.
Simon Dawson | Bloomberg | Getty Images

“There’s no question that we’re seeing a tougher capital markets environment,” Goldman Sachs President John Waldron told analysts at a conference this month.
The industry has a long track record of hiring aggressively in boom times, only to have to turn to layoffs when deals taper off. The volatility in results is one reason investors assign a lower valuation to investment banks than say, wealth management firms. In the decade after the 2008 financial crisis, Wall Street firms contended with the industry’s declining revenue pools by implementing annual layoffs that targeted those perceived to be the weakest performers.

‘Fully staffed’

Banks paused layoffs during the pandemic bull market as they struggled to fill seats amid a hiring push. But that means they are now “fully staffed, perhaps over-staffed for the environment,” according to another recruiter, who declined to be named.
The numbers bear that out. For example, JPMorgan added a net 8,000 positions at its corporate and investment bank from the start of 2020 to this year’s first quarter. The biggest Wall Street firm by revenue now has 68,292 employees, 13% more than when the pandemic began.
Headcount jumped even more at Goldman in the past two years: by 17%, to 45,100 workers. Employee levels at Morgan Stanley jumped 26%, to 76,541 people, although that includes the impact of two large acquisitions.
The math is simple: Investment banking revenue may be falling back to roughly pre-pandemic levels, as some executives expect. But all the major firms have added more than 10% in headcount since 2020, resulting in a bloated expense base.
“When banks have a revenue problem, they’re left with one way to respond,” said McCormack. “That’s by ripping out costs.”
The recruiter said he expects investment banks will trim 5% to 8% of workers as soon as July, after second-quarter results are released. Analysts will likely pressure bank management to respond to the changing environment, he said.
Sources close to JPMorgan, Goldman and Morgan Stanley said they believed that the firms have no immediate plans for broad layoffs in their Wall Street operations, but may revisit staffing and expense levels later this year, which is a typical management exercise.
Banks are still selectively hiring for in-demand roles, but they are also increasingly allowing positions to go unfilled if workers leave, according to one of the people.
“Business has dropped off,” another person said. “I wouldn’t be surprised if there was some type of headcount reduction exercise in the October-November time frame.”

Traders to the rescue?

The saving grace on Wall Street this year has been a pickup in some areas of fixed-income trading. Greater volatility in interest rates around the world, surging commodity prices and inflation at multi-decade highs has created opportunities. JPMorgan’s Pinto said he expected second-quarter markets revenue to increase 15% to 20% from a year earlier.
That too may eventually be under pressure, however. Banks will need to carefully manage the amount of capital allocated to trading businesses, thanks to the impact of higher interest rates on their bond holdings and ever-stricter international regulations.
For employees who have been resisting return-to-office mandates, the time has come to head back, according to McCormack.
“Banks have been very clear about trying to get people back to work,” he said. “If you aren’t stellar and you are continuing to work from home, you are definitely most at risk.”

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Interest payments totaling $100 million were due on May 27 and subject to grace period which expired on Sunday night.
Sweeping sanctions imposed by Western powers in response to Russia’s invasion of Ukraine, along with countermeasures from Moscow, have effectively ostracized the country from the global financial system.

Russian President Vladimir Putin meets with head of Federal Financial Monitoring Service (Rosfinmonitoring) Yury Chikhanchin at the Kremlin in Moscow, Russia June 27, 2022.
Mikhail Metzel | Kremlin | Sputnik | via Reuters

Russia has entered its first major foreign debt default for over a century, after a grace period on two international bond payments lapsed on Sunday night.
Interest payments totaling $100 million were due on May 27 and subject to a grace period which expired on Sunday night. Several media outlets have reported that bondholders have not received the payments, after Russia’s attempts to pay in its ruble currency were blocked by international sanctions.

The Kremlin has rejected the claim that Russia is in default, with spokesperson Dmitry Peskov reportedly telling a press call this morning that Russia made the bond payments due in May but they have been blocked by Euroclear due to Western sanctions, rendering the non-delivery of payments “not [Russia’s] problem.”
Sweeping sanctions imposed by Western powers in response to Russia’s unprovoked invasion of Ukraine, along with countermeasures from Moscow, have effectively ostracized the country from the global financial system, but so far the Kremlin has managed to find ways to get payments to bondholders on multiple occasions.
Attempts to circumvent sanctions took a further blow in late May, however, when the U.S. Treasury Department allowed a key exemption to expire. The waiver had previously allowed Russia’s central bank to process payments to bondholders in dollars through U.S. and international banks, on a case-by-case basis.
Russian Finance Minister Anton Siluanov suggested earlier this month that Russia may have found another means of payment. Moscow wired the $100 million in rubles to its domestic settlement house, but the two bonds in question are not subject to a ruble clause that would allow payment in the domestic currency to be converted overseas.
Reuters reported early on Monday, citing two sources, that some Taiwanese holders of Russian eurobonds have not received the interest payments due on May 27, indicating that Russia may be entering its first foreign debt default since 1918, despite having ample cash and willingness to pay.

Siluanov reportedly told Russian state-owned news agency RIA Novosti that the blockage of payments does not constitute a genuine default, which usually come as the result of unwillingness or inability to pay, and called the situation a “farce.”
A further $2 billion in payments is due before the end of the year, though some of the bonds issued after 2014 are permitted to be paid in rubles or other alternative currencies, according to the contracts.
Although the signals are that payments have indeed been held up by international sanctions, it may take some time to confirm the default.
Decades of default?
Timothy Ash, senior emerging market sovereign strategist at Bluebay Asset Management, said while the default might not have much immediate market impact, Russian sovereign longer maturity eurobonds that were trading at 130 cents before the invasion have already crashed to between 20 and 30 cents, and are now trading at default levels.
“Indeed, Russia likely already defaulted on some ruble denominated instruments owed to foreigners in the weeks just after the invasion, albeit having pulled their ratings, the ratings agencies were not able to call this a default,” Ash said in a note Monday.

“But this default is important as it will impact on Russia’s ratings, market access and financing costs for years to come. And important herein, given the U.S. Treasury forced Russia into default, Russia will only be able to come out of default when the U.S. Treasury gives bond holders the green light to negotiate terms with Russia’s foreign creditors.”
Ash suggested this process could take years or decades, even in the event of a cease-fire that falls short of a full peace agreement, meaning Russia’s access to foreign financing will remain limited and it will face higher borrowing costs for a long time to come.
He argued that Russia’s alternative sources of foreign financing beyond the West, such as Chinese banks, would also be reluctant to look beyond the default headlines.
“If they are prepared to run the secondary sanctions risks — which so far they have not — and still lend to Russia, they will add a huge risk premium to lending rates for the prospect of somehow being dragged into future debt restructuring talks,” Ash said.
“It just makes lending to Russia that much more difficult, so people will avoid it. And that means lower investment, lower growth, lower living standards, capital and human flight (brain drain), and a vicious circle of decline for the Russian economy.”
Russia has thus far managed to implement successful capital controls that have supported the ruble currency, and continued to bring in substantial revenues from energy exports as a result of soaring oil and gas prices.
However, Ash suggested that the carbon transition and accelerated Western diversification away from Russian energy and commodities means that this “golden goose is cooked two to three years down the line.”
“So on a two to three years outlook Russia faces a collapse in export receipts, with almost no access to international financing because of sanctions and default,” he said.
“Meanwhile, with much of Putin’s military having been destroyed in Ukraine, he will struggle to finance military rebuild which he will be desperate to achieve given his desire to retain some kind of parity with NATO.”
The resulting diversion of resources away from consumption and into military investment, Ash argued, could lead to an outlook of “decay and decline” for Putin’s Russia.

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