Russia thinks it has found a way around blocking payment of US dollar bonds

Russian Finance Minister Anton Siluanov (seen here with Russian President Vladimir Putin in 2019) reportedly told Russian newspaper Vedomosti that Moscow would continue to service external debts in roubles, but foreign holders of Eurobonds will have to open ruble and hard currency accounts with Russian banks in order to receive payments.

Mikhail Svetlov | Getty Images News | Getty Images

Russia is exploring a new way to circumvent US sanctions that prevent Moscow from paying its dollar-denominated bonds to foreign investors.

The country is exposed to a historic default after the US Treasury Department authorized the expiration of a waiver of key sanctions last week. The waiver had allowed Russia to process payments to foreign bondholders in dollars through US and international banks, thereby avoiding default.

Russia’s Finance Ministry on Friday transferred $100 million in interest payments on two ruble Eurobonds to its domestic settlement house, but unless the money ends up in the bondholders’ bank accounts. obligations abroad, this could constitute a default.

The payments come with a 30-day grace period, after which Russia could be declared default on its foreign currency debt for the first time since the Bolshevik Revolution of 1917, despite the Kremlin claiming to have enough money to pay – an unprecedented situation for a major economy.

Another $2 billion in payments are due before the end of the year, although some of the bonds issued after 2014 are allowed to be paid in rubles or other alternative currencies, depending on the contracts.

Russian Finance Minister Anton Siluanov reportedly told Russian newspaper Vedomosti on Monday that Moscow would continue to service foreign debt in rubles, but foreign holders of Eurobonds will have to open ruble and hard currency accounts. with Russian banks to receive payments.

“As is the case with the payment of gas in rubles: we are credited with foreign currency, here they are exchanged for rubles on behalf of (the gas buyer), and this is how the payment takes place “, he said, according to a Reuters translation. .

The settlement mechanism would work the same way, but in the opposite direction, and would be routed through Russia’s National Settlement Depository (NSD), Siluanov suggested. The NSD, unlike other major Russian financial institutions, is not currently subject to US sanctions.

However, the European Union on Friday imposed sanctions on the NSD, which was supposed to process bond payments, further complicating matters for Russia.

“The Rope Will Miss”

Timothy Ash, senior sovereign emerging markets strategist at BlueBay Asset Management, told CNBC on Wednesday that foreign investors are unlikely to accept requests from Moscow to open Russian accounts.

“I think it’s unlikely. You’re talking about international companies, US banks, international banks, and it’s ultimately quite peripheral,” he said.

“They’re not going to damage their reputation or give themselves any compliance risk by going through this process for a few hundred million dollars. They don’t want to get caught up in secondary sanctions from the Americans.”

Ash was also skeptical about whether Russia’s plan would save it from being called default by rating agencies and international bodies. He suggested that since all ruble payments will be blocked by the Treasury Department’s Office of Foreign Assets Control, foreign investors will not be paid.

“One way or another, the rope will run out for the Russians,” he said, adding that Russia may, in fact, already be in default because two coupon payments on the OFZ bonds denominated in rubles in early March have not yet been made. reach bondholders.

Other questions also arise as to how foreign investors, both retail and institutional, would go about opening accounts with Russian banks given the current sanctions, or how funds held with from any Russian financial institution can be repatriated without violating sanctions. Bondholders may be reluctant to take this chance and prefer to stay on the safe side of sanctions while going through default legal proceedings.

“Typically, bondholder consent is required to make changes to the time, place or method of payment, so non-participating bondholders may still have potential claims,” ​​said Adam Solowsky. , a partner in the financial sector group of the international law firm Reed Smith. CNBC Friday.

Contagion effect?

However, when asked while there would be a wider contagion effect if Russia were ultimately declared to be in default, Ash said the impact would be limited compared to Russia’s 1998 financial crisis.

“In 1998, there was $60 billion of foreign exposure in the GKO market (zero-coupon short-term Russian government bonds) and there was probably about the same in the debt market. outside, so it was a bigger event,” he said. .

Once Russia defaults, it could stay there for a long time. This is because of the nature of the sanctions and the lack of an imminent resolution to the war in Ukraine. Ash suggested that’s why the Kremlin is fighting the designation.

“The Americans said ‘we want Russia to default’, so they can only come out of default when America says ‘we’re happy now, you can negotiate with bondholders, all is forgiven’ – so it will be in default for a long time, so it’s very, very bad for Russia, in the end,” he said.

“Although they are not in default, there is a chance that someone will lend to them, like the Chinese. Once they are in default, it changes everything. Even the Chinese would be reluctant.”

Comments are closed.