Russia dodges default as some investors receive dollar funds

Three investors who asked not to be identified said their custodian banks had received payments.
Image: Bloomberg

Russia’s closely watched dollar payments on two bonds are trickling through to investors after the country dipped into its local holdings of the US currency and sidestepped its first foreign default in a century.

Three investors who asked not to be identified said their custodian banks had received payments. At least one major international clearinghouse has received and processed payments for the eurobonds due in 2022 and 2042, according to people familiar with the transaction who weren’t authorized to speak publicly on the matter.

The complications with the $650 million in coupon and principal payments are the result of wide-ranging financial and economic penalties imposed on Russia after it invaded Ukraine. They include sanctions on some of the nation’s biggest lenders, asset seizures, and a freeze on the country’s foreign reserves.

The saga kicked off when the funds were blocked in early April, triggering a 30-day grace period that ends on Wednesday. Russia tried to get around the sanctions by paying in rubles, but that’s not allowed under the terms of the bonds. Then, with a default seemingly just days away, the government unexpectedly announced on Friday that the cash was finally moving through the financial system.

For now, Russia has avoided its foreign-currency debt delinquency since the Bolsheviks came to power and repudiated the Tsars’ borrowings in 1918. But Tuesday’s payments may prove a temporary respite.

US sanctions currently include a broad exemption for sovereign bond payments. That runs out on May 25, and the Treasury’s Office of Foreign Assets Control hasn’t said if it will be extended. If it isn’t, that raises a major hurdle for payments due just days later for interest owed on sovereign notes.

“May 25th is the next hurdle,” said Richard Briggs, a money manager at GAM Holdings. “Unless OFAC extends that authorisation, they won’t be able to continue to make payments.”

That decision will come down to whether Washington deems it better to allow Russia to make payments and tap into its dollar cash pile kept at home, “or whether the optics of forcing a default is preferable,” he said.

© 2022 Bloomberg

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