Pimco faces a $2.6 billion loss if Russia defaults on its debt: Report

Pimco, a US investment management firm with over $2.2 trillion in assets under management, is facing a potential loss of up to $2.6 billion. In short, Pimco reportedly bet big on Russia not defaulting on its debt payments earlier this year.

But with the war and sanctions in place, a default looks the more likely scenario. 

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Here’s what to know:

Pimco sold credit default swaps worth $1.1 billion

A report published by The Financial Times says that the asset manager began the year with a $1.1 billion exposure to credit default swaps (CDS) and another $1.5 billion in government bonds.

The CDSs are derivative contracts that shield a buyer in case an issuer of the underlying bond defaults. According to the report, five Pimco funds sold the CDSs to investors, with the company wagering on the premise that Russia would not default.

Having collected premiums from investors, the company is in a tight spot if Russia does indeed fail to honour its creditors.

Other than losing the $1.1 billion wagered on via the credit default swaps, the asset manager could receive another blow on its $1.5 billion held in Russian sovereign bonds.

Biting sanctions raise concerns of Russia defaulting

Russia continues to buckle under the weight of harsh sanctions imposed on the various sectors of the economy. As well as sanctioning wealthy Putin loyalists (oligarchs), the US and EU have placed embargoes on Russian oil and removed the country’s banks from the international payments system SWIFT.

As Kremlin finds it hard to access foreign reserves estimated at over $630 billion, the fear that Russia could default on its debts has increased significantly.

On Sunday, Russia’s government released a statement indicating that it wouldn’t stop servicing its debt. However, it did add that sanctions could make this difficult to repay “non-residents.”