Russia has failed to meet the deadlines because increasing sanctions are blocking the transfer of funds.
Published on June 23, 2022
Russia faces another test of bond payments this week, with just days left before it could face its first default in a century.
Three interest remittances totaling nearly $400 million are due Thursday and Friday, but more urgent is a Sunday evening deadline for earlier missed payments from late May.
Those funds — around $100 million in bond coupons — are stuck due to international sanctions, and the grace period to find a solution expires at the end of the day on June 26. At that point, Russia will effectively default unless it somehow funnels payments to sufficient creditors of the debt.
It’s not that the government lacks the will or money to pay. Billions of dollars in energy revenues pour into the Kremlin’s coffers every week.
Rather, the deadlines are not met because increasing sanctions are blocking the money transfer.
The goal in the White House is to punish the Kremlin’s invasion of Ukraine by sealing its pariah status in the market for decades to come, with the country’s first foreign bankruptcy since the Bolshevik Revolution more than a century ago.
Russia argues that it is being forced into default and is trying to find workarounds. According to a decree signed by President Vladimir Putin, which establishes a mechanism for servicing the bonds, once payment is made in rubles, its obligations are considered fulfilled. Earlier, Finance Minister Anton Siluanov said the government would transfer rubles, which could then be exchanged for foreign currencies.
“We did everything we could to lead the horse to the water, but it’s not up to us whether it wants to drink or not,” Siluanov said last week.
For the remainder of this week, attention will be on the latest coupons due and the Treasury’s payment attempts.
Three coupon payments are due on Thursday and Friday. In the event of late payment, the watch will be put on a grace period of 30 days for the first two and 15 working days for the last.
First, on June 23rd are payments on bonds maturing in 2027 and 2047.
Neither has a clause allowing Russia to pay in rubles, but they do allow alternative currencies including euros, pounds sterling and Swiss francs, bond documents show. If the Treasury intends to switch to one of these currencies, it must give bondholders at least five days’ notice.
But like the stuck coupons, those payments must begin their journey to bondholders at Russia’s sanctioned National Settlement Depository as paying agent. From the NSD the money would normally go to international custodians such as Euroclear and from there to custodian banks around the world where individual bondholders have their accounts.
Payment of $159 million is due June 24 on a 2028 debt instrument that has no alternative options to the dollar. The chances of it going through are slim as the US plans to spin off the Treasury Department on May 25.
Additionally, the denomination on this bond indicates that the payment process would be through a financial infrastructure outside of Russia – with JPMorgan Chase & Co. as the paying agent.