Russia aims to avoid historic default with last-ditch dollar bond payments

Russia faces another threat of default on May 4, according to major rating agencies, as the grace period draws to a close after trying to repay its dollar bonds in Russian roubles.

Mikhail Tereshchenko | sputnik | via Reuters

Russia appears to have avoided a historic sovereign default on Friday by dipping into its national reserves and attempting to make overdue dollar payments on its international debt obligations.

Earlier on Friday, Russia’s Finance Ministry said it had attempted dollar payments – a dramatic reversal after the country previously attempted to make payments on its dollar-denominated bonds in Russian rubles.

The ministry said it made a $564.8 million payment on a 2022 Eurobond and an $84.4 million payment on a 2042 Eurobond, according to Reuters, both in dollars – which was initially stipulated on debt agreements.

The funds are said to have been routed to the London branch of Citibank, but it is unclear whether they will reach their recipients. Payments were due in April and had entered a 30-day grace period before the official default on May 4.

Russian government bonds rallied on Friday afternoon after news from the Finance Ministry. But observers close to Moscow like Timothy Ash, emerging markets strategist at BlueBay Asset Management, were unsure whether he would still be able to avoid a default.

“CDS Committee [credit derivatives determinations committee] already ruled by default, so that’s pretty extraordinary…bonds are rallying hard…crazy,” he said in a flash note on Friday afternoon.

A senior US official said later Friday that Russia had not mobilized money through the US system and that the payments involved new funds.

β€œThe main concern was whether they were going to use funds tied up in the United States or use the money they used to support the ruble and the war effort. It seems to come from this pile of money because we have not authorized any transactions involving the funds tied up in the United States,” the official said, according to Reuters.

A spokesperson for the Treasury Department’s Office of Foreign Assets Control, or OFAC, was not immediately available for comment when contacted by CNBC.

Assets frozen

About half of Russia’s vast foreign exchange reserves have been frozen by punitive economic sanctions imposed by international powers following its invasion of Ukraine.

On April 4, Russia made payment on the two sovereign bonds due to mature in 2022 and 2042 in local currency rather than dollars as required by the terms of its contract.

In a recent statement, ratings agency Moody’s said that this deviation from the payment terms of the original bond contracts could be considered a default if not corrected by the end of the month’s grace on May 4th.

“The bond contracts do not provide for redemption in a currency other than the dollar. Although Eurobonds issued after 2018 allow under certain conditions to make redemptions in rubles, those issued before 2018 (including the 2022 and 2042 bonds ) either do not contain this alternative currency clause or allow repayments to be made only in other hard currencies (dollars, euros, pounds sterling or Swiss francs),” said analysts from Moody’s Sovereign Risk Group.

The rating agency said it did not believe investors had obtained the contractual foreign currency pledge by the payment due date.

S&P Global Ratings also downgraded Russia’s external debt credit rating to selective default after it was paid in rubles on April 4.

The attempt to pay in rubles came after the US Treasury Department in early April refused a waiver for Russian payments to foreign bondholders despite US sanctions, a special authorization it had previously granted in March.

The move prevented the Kremlin from paying holders of its sovereign debt with the more than $600 million in dollar reserves held with US financial institutions. The goal was to force Russia to either use more of its own stock of dollar reserves or accept its first default on its foreign debt in more than a century.

While sanctions imposed following Russia’s invasion of Ukraine had already frozen the Russian Central Bank’s foreign currency reserves held with US banks, the Treasury had allowed Moscow to use those funds if per case to meet its dollar coupon payment obligations. denominated debt.

Historical default

Russia appears to have avoided a historic bond default in March, making interest payments worth $117 million on two dollar-denominated sovereign Eurobonds after speculation it tried to pay in rubles.

Kremlin spokesman Dmitry Peskov said at the time that any default would have been ‘purely artificial’ because Russia had the funds to meet its foreign debt obligations but would be prevented from doing so by Western sanctions .

Wednesday’s default would be Moscow’s first on its foreign debt since the 1917 Bolshevik Revolution, and could spark a messy period of legal wrangling.

Russian Finance Minister Anton Siluanov told the pro-Kremlin newspaper Izvestia last month that Russia would take legal action if it was forced into default by sanctions.

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