Russian President Vladimir Putin speaks during a meeting with business representatives at the Kremlin in Moscow, Russia, February 24, 2022.
Alexey Nikolsky | Satellite | via Reuters
Russia appears to have avoided a historic debt default as it claims to have paid important interest on two dollar-denominated Eurobonds.
The Russian Ministry of Finance said on Friday that the London branch of paying agent Citi had received $117 million in payments. The US Bank is responsible for processing payments on behalf of bondholders.
It was unclear whether Russia would be able to meet its external debt obligations after a flurry of economic sanctions over its invasion of Ukraine.
The measures imposed by the US and international allies blocked much of Russia’s foreign exchange reserves and were designed to cut Moscow off from the global financial system.
The Kremlin had to pay $117 million in interest on two sovereign Eurobonds by the end of the working day on Wednesday. Failure to repay these payments may have led to Russia’s first foreign currency default in more than a century.
Holders of two Russian dollar bonds said coupon payments arrived on Thursday, a day later than expected, the Wall Street Journal reported, citing investors and traders, but the funds were received within a 30-day grace period under the bonds’ terms.
Kremlin spokesman Dmitry Peskov said on Thursday that any default would be “purely artificial” because Russia has the funds it needs to meet its external debt obligations.
While in this case Russia appears to have been able to meet its coupon obligations in full, Moscow’s willingness and ability to repay its international debt is likely to be tested again.
This is because the exemption currently granted under US sanctions expires at the end of May, which is likely to further complicate Russia’s ability to service external debt payments.
How were the payments?
Economists were unsure how the Russian Finance Ministry would approach the payment in light of targeted measures against the Central Bank of Russia that made much of its foreign exchange reserves unavailable, prompting a series of credit rating downgrades by the world’s major rating agencies.
Russia’s central bank asked JPMorgan Chase, the largest US bank by assets, to process the $117 million in coupon payments they received on their sovereign bonds. The payment was transferred to the Citi payment agent in London after consultation with the US Department of the Treasury.
A spokesman for the US Treasury Department was unable to immediately respond to CNBC’s inquiry on Friday morning.
JP Morgan Chase and Citi declined to comment.
Citi, as paying agent for foreign bondholders of Russia, was responsible for the administrative role of receiving and processing payments to the securityholder on behalf of the issuer. It is generally not permitted to disclose confidential and financial information.
Tim Ash, Senior Emerging Markets Sovereign Strategist at BlueBay Asset Management, called the payment a “ridiculous move” by the US Treasury’s Office of Foreign Assets Control.
OFAC applies and enforces economic sanctions based on US foreign policy objectives.
“OFAC is helping Western bondholders who should have known better and whose actions worked against Western security interests, and are effectively taking money out of a potential Ukraine reparation fund,” Ash said in an email Friday, noting that the Russians were “the biggest beneficiary.” “. this bond payment.
The US Treasury Department has previously said that the sanctions imposed on Russia do not prevent the country from paying off its international debts, at least until May 25.
“High Vulnerability” to Debt Defaults
Rating agency S&P on Thursday downgraded Russia’s foreign and local currency sovereign credit ratings to ‘CC’ from ‘CCC’, citing the Kremlin’s ‘high vulnerability’ to debt defaults.
“While public statements from the Russian Ministry of Finance suggest that the government is currently still trying to transfer payment to bondholders, we believe that debt service payments on Russian Eurobonds maturing in the next few weeks may face similar technical difficulties,” — Credit said. This was announced on Thursday by the S&P rating agency.
St. Basil’s Cathedral and the Kremlin Tower are visible on Red Square in Moscow.
sopa images | Light rocket | Getty Images
S&P said it could downgrade the Russian foreign issuer’s credit rating even further to SD if Moscow fails to meet its external debt obligations in the coming weeks.
The scheduled expiration of OFAC’s license for payments on May 25 could negatively impact Russia’s ability to service its debt obligations after that date, he added.