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Russia appears to have avoided its historic bond default – for now

Russia appears to have avoided its historic bond default - for now

Russian President Vladimir Putin speaks during a meeting with representatives of the business community at the Kremlin in Moscow, Russia on February 24, 2022.

Alexey Nikolsky | Sputnik | via Reuters

Russia appears to have avoided a historic default, as it claims to have made crucial interest payments on eurobonds denominated in dollars.

Russia’s Finance Ministry said on Friday that the London branch of payment agent Citi had received $117 million in total payments. The US bank is responsible for processing payments on behalf of bondholders.

It was not clear whether Russia would be able to meet its foreign debt obligations after a barrage of economic sanctions its conquest of ukraine.

The measures imposed by the United States and international allies blocked a significant portion of Russia’s gold and foreign exchange reserves, and sought to isolate Moscow from the global financial system.

The Kremlin had until the close of business on Wednesday to pay $117 million in interest on sovereign international bonds. Failure to meet these payments could have cleared the way for Russia First default on foreign currency debt in more than a century.

Russian dollar bond holders said coupon payments arrived Thursday, a day later than expected, The Wall Street Journal mentionedciting investors and traders, but the money was well received within the 30-day grace period under the terms of the bonds.

Kremlin spokesman Dmitry Peskov said on Thursday that any default would have occurred.purely artificialBecause Russia has the funds to meet its foreign debt obligations.

While Russia appears to have been able to meet its coupon payment obligations in full on this occasion, Moscow’s willingness and ability to repay its international debt will likely be tested once again.

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That’s because the exemption currently granted under US sanctions is set to expire in late May, and is likely to further complicate Russia’s ability to service foreign debt payments.

How did the payments go?

Economists were unsure how the Russian Finance Ministry would handle the repayment in light of targeted actions on the Russian Central Bank that made many of its foreign exchange reserves inaccessible, leading to a series of credit cuts from major global rating agencies.

c. B. Morgan Chase, the largest US bank by assets, was asked by the Russian Central Bank to process the $117 million coupon payments they had on their sovereign bonds. The payment was transferred to the Citi Payment Agent in London after consultation with the US Treasury.

A US Treasury spokesperson was not immediately available to respond when contacted by CNBC on Friday morning.

JPMorgan Chase and Citi declined to comment.

As the payment agent for foreign bondholders in Russia, Citi was responsible for the administrative role of receiving and processing payments to the escrow holder on behalf of the issuer. Disclosure of confidential and financial information is usually not permitted.

Tim Ash, chief emerging markets strategist at BlueBay Asset Management, described the payment as a “ridiculous move” by the US Treasury’s Office of Foreign Assets Control.

OFAC administers and imposes economic sanctions on the basis of US foreign policy objectives.

“OFAC is bailing out Western bondholders who should have known better, whose actions were working against Western security interests, and taking valid money from a potential Ukraine Compensation Fund,” Ash said by email Friday. The “big beneficiary” of the payment of this guarantee.

The US Treasury previously said that sanctions against Russia do not prevent it from meeting its international debt payments, at least until May 25.

High vulnerability to debt default

Credit rating agency Standard & Poor’s on Thursday lowered Russia’s foreign and domestic currency sovereign credit rating to “CC” from “CC”, citing “the Kremlin’s severe weakness” for debt default.

“Although public statements from the Russian Ministry of Finance suggest to us that the government is currently still trying to transfer the payment to bondholders, we believe that debt service payments on Russian Eurobonds due in the next few weeks may encounter similar technical difficulties,” the rating agency said. S&P on Thursday.

Saint Basil’s Cathedral and the Kremlin Tower can be seen on Red Square in Moscow.

soba pictures | Light Rocket | Getty Images

Standard & Poor’s said it may lower Russia’s foreign issuer credit rating further to “SD” if Moscow fails to meet its foreign debt obligations in the coming weeks.

It added that the scheduled expiration of OFAC’s license for payments on May 25 could negatively affect Russia’s ability to service its debt obligations after that date.