Investment giant Pimco risks losing up to $2.6 billion if Russia defaults on its debt: report

• Pimco sold $1.1 billion of credit default swaps that compensate holders if Russia fails to make payments on its debt.
• The asset manager also holds $1.5 billion of Russian government bonds, the FT reported Wednesday.

Pimco is at risk of losing up to $2.6 billion if Russia fails to make its debt payments, after the asset manager bet big against a default, according to a Financial Times report.

The investing giant holds $1.5 billion in Russian Federation-linked government bonds, the report said, and it had sold $1.1 billion in credit default swaps, or CDS, on Russian sovereign debt at the start of 2022.

That means Pimco is vulnerable to lose out on two fronts — the bond holdings and the CDS — if Russia does default on its sovereign debt, which Fitch Ratings has warned is imminent.

At least five Pimco funds sold the CDS to investors wanting insurance against a potential Russian default, the FT reported, with the asset manager betting that Russia would meet its obligations. Pimco did not respond to an Insider request for comment.

Under the derivatives contracts, customers pay a premium to Pimco periodically and get compensation if Russia fails to pay.

At the same time, the bonds and CDs make up a small amount of the funds that hold them. In addition, Pimco has already marked down most of these positions to reflect their current worth.

Russia has been pummeled by Western sanctions that threaten its economy since it invaded Ukraine two weeks ago, and doubts have risen about its ability to pay its debts. Its currency, the ruble, has plunged to below 1 cent, and its financial markets have been thrown into disarray.

"More generally, the further ratcheting up of sanctions, and proposals that could limit trade in energy, increase the probability of a policy response by Russia that includes at least selective non-payment of its sovereign debt obligations," Fitch said Wednesday, as it cut Russia's credit rating deeper into junk territory.

Agencies S&P Global and Moody's have similarly downgraded Russia's credit rating since its attack on Ukraine.

Russia's government said Sunday it would continue to service its debt, but warned that Western sanctions could restrict its ability to meet its obligations, the BBC reported.

Pimco isn't the only major fund manager struggling with its Russian wagers. A BlackRock hedge fund suffered big losses for its clients last month after the fund increased its bet on Russian stocks just before the country invaded Ukraine, Bloomberg reported.

The BlackRock Emerging Frontiers Fund lost more than 10% in value in February due to the wager. The bet on Russian stocks accounted for about 9% of the fund's total gross assets.

Read more: Goldman Sachs' renowned chief economist lays out what Russia's invasion of Ukraine will mean for global oil prices, the stock market, an 'overheating US economy' and Federal Reserve rate rises