Russia looks to swerve default with last minute dollar bond payment

Russia made what appeared to be a late U-turn to avoid a default on Friday, as it made a number of already-overdue international debt payments in dollars despite previously vowing they would only be paid in roubles as long as its reserves remained frozen.

Russia’s $40 billion of international bonds have become a focus in the game of financial tit-for-tat that has developed about a possible default.

Russia’s finance ministry said it had managed to pay $564.8 million on a 2022 Eurobond and $84.4 million on another 2042 bond in dollars – the currency specified on the bonds.

A senior US official confirmed Moscow had made the payment without using its reserves frozen in the United States though added the exact origin of the funds was unclear.

“We didn’t authorize any transactions involving the immobilized funds in the US,” the US official said. “They kind of caved on this one to avoid a default, and that’s a good thing.”

Russia’s ministry said it had channeled the required funds to the London branch of Citibank, one of the so-called paying agents of the bonds whose job it is to disburse them to the investors that originally lent the money to Moscow.

Citibank declined to comment.

“The payments were made in the currency of issue of the corresponding Eurobonds – in US dollars,” the Russian Finance Ministry said in a statement. “Thus, the obligations to service sovereign Eurobonds are fulfilled.”

Two holders of the bonds awaiting payment said they had not yet received the funds, but the process can take days.

“It is unclear what the paying agent will be doing right now… but I don’t see a reason why they cannot make that payment,” said Kaan Nazli, portfolio manager for the Emerging Markets Debt team at Neuberger Berman, a holder of Russian sovereign bonds.

BONDS SOAR

Russia has not had a default of any kind since a financial crash in 1998 and has not seen a major international or ‘external’ market default since the aftermath of the 1917 Bolshevik revolution.

The risk of another one though is now a flashpoint in the economic tussle with Western countries which have blanketed Russia with sanctions in response to its invasion of Ukraine that Moscow has termed a “special military operation”.

The bonds were originally supposed to be paid earlier this month but an extra 30-day ‘grace period’ that government bonds often have in their terms meant Moscow’s final deadline was on May 4.

Brokers said the announcement sent Russian government bond prices up as much as 15 cents, almost doubling their dollar value in some cases. Those belonging to major still-unsanctioned companies such as Gazprom, Lukoil and telecoms firm VimpelCom were quoted up 2-5 cents too.

BlueBay’s Tim Ash said it was a “pretty extraordinary” move from Russia pointing out too that the key group of international banks and funds that judge whether a default has happened, had recently already judged it had in Russia’s case.

The prospect of a default by Russia was almost unthinkable before its invasion of Ukraine. The billions of dollars it earns from selling oil and gas around the world meant it had one of the world’s lowest government debt levels and an enormous stockpile of currency reserves.

Western sanctions though have frozen a large chunk of those reserves and other sanctions means banks have needed special dispensations to make any Russian-related payments.

Andy Sparks, managing director at index provider MSCI, said the prospect of a default still loomed large as a license put in place by Washington to allow Russian debt payments to be processed was due to expire on May 25.

Russia has another bond payment just two days after that which means that if the US waiver isn’t extended, it would be almost impossible for Moscow to avoid a default.

“The real question is whether this is just delaying the inevitable,” Sparks said.

“Most investors will take that date of May 25 very seriously and many will not expect that exception to be extended.”