Russia pays bondholders in roubles after US blocks dollar payments

Moscow has a 30-day grace period to make the payment in greenbacks in order to avoid default

Russian and US banknotes. Moscow says it will continue to pay bondholders in roubles due to sanctions. Reuters

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Russia edged closer to a potential default on its international debt on Wednesday as it paid dollar bondholders in roubles and said it would continue to do so as long as its foreign exchange reserves are blocked by sanctions.

The US on Monday stopped Russia from paying holders of its sovereign debt more than $600 million from frozen reserves held at US banks, saying Moscow had to choose between draining its dollar reserves at home and default.

Russia has not defaulted on its external debt since reneging on payments due after the 1917 Bolshevik Revolution. However, its bonds have remerged as a flashpoint in the diplomatic crisis and tit-for-tat sanctions between Moscow and western capitals.

“This speeds up the timeline around when Russia runs out of space on willingness and ability to pay,” said one fund manager holding one of the bonds due for payment on Monday.

The Kremlin said it would continue to pay its dues.

“Russia has all necessary resources to service its debts … If this blockade continues and payments aimed for servicing debts are blocked, it [future payment] could be made in roubles,” Kremlin spokesman Dmitry Peskov said.

Moscow had managed to make a number of foreign exchange coupon payments on some of its 15 international bonds with an outstanding face value of about $40 billion before the US stopped such transactions.

Russia's finance ministry said on Wednesday it had to pay roubles to holders of its dollar-denominated Eurobonds maturing in 2022 and 2042 as a foreign bank had refused to process an order to pay $649m to holders of its sovereign debt.

The finance ministry said the foreign bank, which it did not name, rejected Russia's order to pay coupons on the two bonds and also did not process payment of a Eurobond maturing in 2022.

Russia's ability to fulfil its debt obligations is in focus after sweeping sanctions in response to what Moscow calls “a special military operation” in Ukraine have frozen about half of its reserves and limited access to global payment systems.

Russia may consider allowing foreign holders of its 2022 and 2042 Eurobonds to convert rouble payments into foreign currencies once access to its forex accounts is restored, the finance ministry said.

Until then, a rouble equivalent of Eurobond payments aimed at bondholders from so-called unfriendly nations will be kept in special “C” type accounts at Russia's National Settlement Depository, the ministry said.

Both bonds were issued in 2012 and stipulate payment in US dollars — unlike some bonds that were sold later and allow for payment in alternative currencies such as euros, British pounds, Swiss francs or even roubles.

Russia has a 30-day grace period to make the dollar payment. However, if the cash does not show up in bondholders' accounts within that time frame, it would constitute a default, global rating agencies have said.

Moscow introduced stringent capital controls to shore up its currency after the war began. This, together with financial sanctions, makes it impossible for foreign investors to repatriate any payments.

Default warnings were flashing brightly again on Wednesday. One-year upfront credit default swaps — a way of insuring exposure to Russia's sovereign debt — jumped to 69 points, from 60 points, said IHS Markit.

Russia's longer-dated dollar bonds, where trading has all but ceased, were quoted well below 20 cents on the dollar, while euro-denominated issues were bid at 15 cents.

Russia dismissed this as being a default situation.

“In theory, a default situation could be created but this would be a purely artificial situation,” Mr Peskov said. “There are no grounds for a real default.”