Russia has started the payment process of two bond coupons due this week in what has become the most closely watched debt settlement since the energy-rich nation invaded Ukraine.
The Finance Ministry issued an order to pay Eurobond holders $117 million, although it didn’t specify if the payment is in dollars — the currency they were issued in — or rubles. Finance Minister Anton Siluanov has said repeatedly that the nation will ultimate pay in rubles if sanctions imposed on Russia don’t allow dollar settlements.
“They are attempting the pay in dollars, but it’s likely the Central Bank of Russia’s dollar account cannot be debited,” said Pavel Mamai, founding partner at London-based hedge fund Promeritum Investment Management LLP. “The Russians are saying: we did everything we could. If you don’t get the money, blame sanctions.”
Neither of the two bonds have ruble-fallback options, which would’ve allowed Russia to settle the coupons in its local currency.
If the payment’s in rubles, then it could put the nation on course for its first foreign-currency default since the Bolsheviks refused to service or recognise the czar’s debts a century ago. S&P Global Ratings said earlier in March that a payment in a different currency than the one agreed may be deemed a default. In 1998, Russia defaulted on local-currency debt and declared a moratorium on payments for its foreign-currency bonds.
The coupon deadline on March 16 — as stipulated by the bonds’ documents — have been at the center of investors’ attention since the US and its allies froze Russia’s foreign-currency reserves to punish the Kremlin for its invasion of Ukraine. A March decree by President Vladimir Putin ruled that investors from so-called hostile nations could be paid in rubles, further inflaming concerns the country may choose not to honour its debts. That sent credit default swaps — insurance-like contracts for bonds — soaring to a record.
While Putin’s decree determines that a debt has been settled if it’s paid in rubles, myriad sanctions and capital controls mean its near impossible to transfer rubles outside of Russia. Even if investors could move the money, the debt is in dollars, and is meant to be serviced in that currency.
There’s a 30-day grace period on both bonds. But if either the bondholders, rating agencies or the Credit Derivatives Determinations Committee decide a payment in rubles for the two bonds constitutes a credit event, then Russia is officially in default if doesn’t repay the coupon in dollars before the grace period is up.