Russia appears to have warned of its historic bond default for now

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Russia appears to have warned of its historic bond default for now

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Russian President Vladimir Putin speaks during a meeting with representatives of the business community in the Kremlin in Moscow, Russia on February 24, 2022.

Alessio Nikolskyi | sputnik | via Reuters

Russia appears to have avoided a historic debt default as it claims to have met crucial interest payments on two dollar-denominated Eurobonds.

The Russian finance ministry said Friday that the London branch of paying agent Citi has received $ 117 million in total payments. The US bank is responsible for processing payments on behalf of bondholders.

It was unclear whether Russia would be able to meet its foreign debt obligations following the flurry of economic sanctions for the invasion of Ukraine.

Measures imposed by the United States and international allies have blocked much of Russia’s gold and foreign exchange reserves and sought to isolate Moscow from the global financial system.

The Kremlin had had until the end of business Wednesday to pay $ 117 million in interest on two sovereign Eurobonds. Failure to pay these payments could have paved the way for Russia’s first foreign currency debt default in more than a century.

Holders of two Russian dollar bonds said coupon payments came on Thursday, a day after expected, the Wall Street Journal reported, citing investors and traders, but that the funds were received well within the period. 30-day pardon according to the terms of the obligations.

Kremlin spokesman Dmitry Peskov said Thursday that any default would be “purely artificial” because Russia had the funds it needed to meet its foreign debt obligations.

While Russia appears to have been able to fully meet its coupon payment obligations on this occasion, Moscow’s willingness and ability to repay its international debt is likely to be tested again.

This is because an exemption currently granted under US sanctions will expire in late May, likely further complicating Russia’s ability to pay foreign debt payments.

How did the payments go?

Economists were unsure how the Russian Ministry of Finance would deal with the payment in light of targeted measures on the Russian Central Bank which made much of its foreign exchange reserves inaccessible, leading to a series of credit downgrades by major rating agencies. global.

JPMorgan Chase, the largest US bank by assets, was asked by the Central Bank of Russia to process coupon payments of $ 117 million they had on their sovereign bonds. The payment was transferred to the Citi paying agent in London after consultation with the US Treasury Department.

A spokesperson for the US Treasury Department declined to comment when contacted by CNBC on Friday morning.

JP Morgan Chase and Citi also declined to comment.

Citi, as the paying agent for Russia’s foreign bondholders, was responsible for the administrative role of receiving and processing payments to a security holder on behalf of the issuer. It is generally not permitted to disclose confidential and financial information.

Tim Ash, senior sovereign emerging markets strategist at BlueBay Asset Management, described the payment as a “ridiculous move” by the US Treasury Department’s Office of Foreign Assets Control.

OFAC administers and applies economic sanctions based on US foreign policy goals.

“OFAC is bailing out Western bondholders they should have known better, and whose stocks were working against Western security interests, and is actually taking money from a potential Ukraine repair fund,” Ash said on Friday. e-mail, pointing out that the Russians were the “greatest beneficiary” of this bond payment.

The US Treasury has previously said that sanctions imposed on Russia do not prevent the country from paying off international debt payments, at least until May 25.

‘High vulnerability’ to non-payment of debt

On Thursday, the S&P rating agency downgraded Russia’s sovereign credit ratings in foreign and local currencies to “CC” from “CCC”, citing the Kremlin’s “high vulnerability” to non-payment of debt.

“Although public statements from the Russian finance ministry suggest that the government is currently still trying to pass the payment on to bondholders, we believe that debt service payments on Russian Eurobonds due in the coming weeks could face similar technical difficulties,” Lo said. ratings agency S&P said Thursday.

St. Basil’s Cathedral and a Kremlin tower are visible on the Red Square in Moscow.

Sopa Pictures | light rocket | Getty Images

S&P said it could further lower the credit ratings of Russia’s foreign issuers to “SD” if Moscow fails to meet its foreign 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 honor its debts after that date, he added.

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