Russia faces a new debt default threat on May 4, according to major rating agencies, as the grace period comes to an end after it tried to pay off its dollar bonds in Russian rubles.
Mikhail Tereshchenko | Sputnik | via Reuters
Russia appears to have avoided a historic sovereign default on Friday by tapping into its domestic reserves and attempting to make late dollar payments on its international debt obligations.
Earlier on Friday, Russia’s Finance Ministry said it had attempted payments in dollars, a dramatic U-turn after the country had previously tried to make payments on its dollar-denominated bonds in Russian rubles.
The ministry said it had 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 were originally stipulated in the debt agreements.
The funds have reportedly been funneled to the London branch of Citibank but it is not clear if 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 rose on Friday afternoon on the news from the Finance Ministry. But close Moscow watchers like Timothy Ash, emerging-markets strategist at BlueBay Asset Management, weren’t sure if it could still avoid a default.
“CDS committee [credit derivatives determinations committee] already ruled by default so this is quite extraordinary… bonds are rallying strongly… crazy,” he said in a flash note Friday afternoon.
A senior US official said later on Friday that Russia had not moved any money through the US system and that the payments involved fresh funds.
“The main concern was whether they would use the funds that were tied up in the US or use the money that they have been using to prop up the ruble and the war effort. It looks like it came from that pile of money because we don’t authorize any transactions involving the funds tied up in the United States,” the official said, according to Reuters.
A spokesman for the US Treasury Department’s Office of Foreign Assets Control (OFAC) was not immediately available for comment when contacted by CNBC.
About half of Russia’s vast foreign exchange reserves have been frozen by punitive economic sanctions imposed by international powers in the wake of its invasion of ukraine.
On April 4, Russia made a payment on the two sovereign bonds due in 2022 and 2042 in local currency instead of dollars, as required by the terms of their contract.
In a recent statement, rating agency Moody’s said this deviation from payment terms relative to the original bond contracts may be considered a default if it is not remedied before the end of the one-month grace period on May 4.
“The bond contracts do not provide for redemption in any currency other than the dollar. Although Eurobonds issued after 2018 allow, under certain conditions, redemptions to be made in rubles, those issued before 2018 (including Eurobonds 2022 and 2042) do not contain this alternative currency clause or allow redemptions to be made only in other hard currencies (dollar, euro, pound sterling or Swiss franc),” said analysts at Moody’s sovereign risk group.
The rating agency said it did not believe that investors would obtain the contractual promise in foreign currency on the payment due date.
S&P Global Ratings also downgraded Russia’s foreign debt to selective default after its payment in rubles on April 4.
The attempt to pay in rubles occurred after the The US Treasury Department in early April rejected a waiver for Russian payments to foreign bondholders despite US sanctions, a special permit it had granted in March.
The move prevented the Kremlin from paying holders of its sovereign debt with more than $600 million dollars of reserves in US financial institutions. The goal was to force Russia to deplete more of its own dollar reserves or agree to its first foreign debt default in more than a century.
While the sanctions imposed after the Russian invasion of Ukraine had already frozen the Russian Central Bank’s foreign currency reserves in US banks, the Treasury had allowed Moscow to use those funds on a case-by-case basis to meet coupon payment obligations in your dollars. named debt.
Russia seemed to have avoided a historic bond default in March, meeting $117 million worth of interest payments on two dollar-denominated sovereign Eurobonds after speculation that he might have tried to pay in rubles.
Kremlin spokesman Dmitry Peskov said at the time that any breach would have been “purely artificial“because Russia had the funds to meet its foreign debt obligations, but Western sanctions would prevent it from doing so.
Wednesday’s default would be Moscow’s first on its foreign debt since the 1917 Bolshevik Revolution, and could trigger a messy period of legal wrangling.
Russian Finance Minister Anton Siluanov told the pro-Kremlin Izvestia newspaper last month that Russia would take legal action if forced to breach sanctions.