Russia blames sanctions for pushing it into first default since 1998


Russia’s finance minister said the country paid what it owed on its foreign debts on Wednesday but was unsure the payments would be made, blaming US sanctions for putting the country on a path to default of payment.

The Russian government is due to pay $117 million in interest on two dollar-denominated government bonds on Wednesday. Failure to pay, or attempting to pay in rubles instead of dollars as required by the bonds, would pave the way for Russia to be defaulted by its creditors.

The bonds have a 30-day grace period, which means creditors can’t declare an official default until April 15.

“The possibility or impossibility of fulfilling our foreign currency obligations does not depend on us,” Finance Minister Anton Siluanov said in an interview with state-owned Russia Today. “We have the money, we have paid the payment, now the ball is on the side, first, of the American authorities.” Earlier this week, he indicated that the payment could end up being made in rubles.

An investor who owns the two bonds said he had not yet received payment as of early Wednesday.

The last time Russia waived its foreign debts was after the Bolshevik Revolution in 1918. Russia defaulted on its local government debt in 1998 as the post-Soviet economy struggled to find its footing . Oil prices had crashed to $10 a barrel, depriving the government of revenue. The crisis paved the way for President Vladimir Putin’s rise to power in late 1999.

In theory, Russia has a lot of money. As war with Ukraine approaches, it has accumulated more than $630 billion in foreign currency reserves, which it can use in normal times to pay off its debts.

But punitive US sanctions against Russia’s central bank and finance ministry have called into question what Russia is allowed to do with the reserves.

The U.S. banned transactions by U.S. institutions with Russia’s central bank and finance ministry, but later issued a temporary exemption that allows U.S. and foreign banks to receive payment for Russia’s debts in the specified currencies through bond contracts.

Russian President Vladimir Putin chaired a meeting with government officials by teleconference in Moscow on March 10.


Photo:

mikhail klimentyev/Agence France-Presse/Getty Images

Payment of interest on bonds issued before March 1 by Russia’s central bank, national wealth fund or finance ministry is allowed until May 25, the Treasury Department said.

After this exemption expires, a specific license approved by the Treasury would be required to continue to receive interest, dividends or payments when due on debt or equity issued by Russian government institutions, it said. he declares.

Investors and analysts expect that under these rules Russia will still be able to service its foreign currency debt in the coming weeks.

“They’re playing a game of chicken with the West,” said Timothy Ash, senior emerging markets sovereign strategist at BlueBay Asset Management. “Our understanding is that it is possible to make the payment.”

Russia’s possible default has brought back memories of the country’s 1998 debt crisis, which reverberated around the world and triggered a big swoon on Wall Street. This led to the collapse of the Long-Term Capital Management hedge fund and necessitated a bailout organized by the Federal Reserve by major Wall Street banks.

Although Russia’s invasion of Ukraine had a major impact on markets, an official determination of default will not necessarily trigger further market turmoil.

Foreign investors managing portfolios in emerging markets held Russian debt before the war, but Russia was only a slice of the global bond universe. Many investors have already reduced the value of the bonds to a level indicating that Russia will be in a long financial freeze.

Rating firm Fitch said a payment in rubles to holders of Russian dollar-denominated bonds would constitute default after the 30-day grace period expires. A default on local government debt could occur even earlier. Fitch said if the Russian state did not pay its bondholders in local currency within 30 days of not transferring payments to foreign bondholders on March 2, it would also declare the country in default.

The Russian Finance Ministry did not respond to a request for comment on US sanctions that would prevent it from paying its creditors. The Biden administration has described Moscow’s treatment of how and whether to pay its bonds as a choice between honoring its contractual obligations and funding its war in Ukraine.

“The Russian economy is in a state of pain. It’s a financial crisis,” US Treasury Assistant Secretary Wally Adeyemo told CNBC on Monday. the future, and these choices will end up putting [Mr. Putin] in a position where he has to make a decision as to whether he continues the invasion or if he stops this invasion.

Moscow still has $615 million in payments due by the end of March to bondholders, some of which can be paid in rubles. Then Russia faces an even bigger hurdle in April, when it has a $2 billion bond maturing, which will require the payment of dollars.

“It’s just a lot of anticipation right now for a lot of this. Everyone spends a lot of time trying to figure out all these questions,” said Daniel Wood, portfolio manager at William Blair Investment Management.

Bonds maturing in 2023 were trading at around 27 cents on the dollar with a yield of 124% on Tuesday, compared with less than 2% at the start of the year, according to AdvantageData. Those maturing in 2043 have been bought and sold for around 22 cents over the same period.

—Anna Hirtenstein contributed to this article.

Write to Caitlin Ostroff at caitlin.ostroff@wsj.com, Alexander Saeedy at alexander.saeedy@wsj.com and Ian Talley at Ian.Talley@wsj.com

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