Russia appears to have avoided its historic default on its bonds

Russia appears to have avoided its historic default on its bonds

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

Alexey Nikolsky | Sputnik | via Reuters

Russia appears to have avoided a historic bankruptcy as it claimed it made principal interest payments on its dollar-denominated Eurobonds.

Russia’s Finance Ministry said on Friday that the London branch of payment agent Citi had received a total of $117 million in 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 due to the invasion of Ukraine.

The measures imposed by the United States and its 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 Wednesday to pay $117 million in interest on intergovernmental bonds. Failure to meet those payments could have paved the way for Russia’s first foreign-currency debt default in more than a century.

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

Any default would have occurred, Kremlin spokesman Dmitry Peskov said Thursday, artificially because Russia has the resources to meet its foreign debt obligations.

While Russia appears to have been able to fully honor its coupon payment obligations 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 expires at the end of May and is likely to further complicate Russia’s ability to repay foreign debt.

Economists were unsure how the Russian Finance Ministry would handle the repayment in light of the crackdown 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.

Russia’s central bank has asked CB Morgan Chase, the largest US bank by assets, to process $117 million in coupon payments on its Treasuries. The payment was transferred to the Citi Payment Agent in London after consultation with the US Treasury.

A US Treasury spokesman declined to comment when contacted by CNBC on Friday morning.

JPMorgan Chase and Citi declined to comment.

As a 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 generally prohibited.

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 run counter to Western security interests, and is taking valid money from a potential Ukrainian compensation fund,” Ash said by email on Friday. guarantee.

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

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Credit rating agency Standard & Poor’s on Thursday lowered Russia’s credit rating in foreign and domestic currencies from “CC” to “CC”, citing the “extreme weakness of the Kremlin” due to default.

“While public data from the Russian Ministry of Finance indicates to us that the government is currently still trying to transfer payments to bondholders, we believe that debt service payments on Russian Eurobonds due in the coming weeks will be similar. It is facing technical problems,” he said. official speaker. Rating agency S&P announced this on Thursday.

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

soba pictures | light missile | Getty Images

Standard & Poor’s said it may lower Russia’s credit rating to foreign issuers to “SD” if Moscow defaults on its foreign debt obligations in the coming weeks.

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

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