By Marc Jones and Andrea Shalal
LONDON/WASHINGTON (Reuters) – Russia made what appeared to be a late U-turn to avoid a default on Friday as it made a number of late dollar interest payments on its bonds to the abroad, while it had previously agreed to pay only in rubles as long as its reserves remained frozen.
Russia’s $40 billion in international bonds have become the center of a financial chicken game amid sweeping Western sanctions – and speculation of a default is set to resurface in less than four weeks, when a license US authorizing Moscow to make payments will expire.
Russia’s finance ministry said it managed to pay $564.8 million in interest on a 2022 Eurobond and $84.4 million on another 2042 bond in dollars – the currency specified on the bonds .
A senior US official confirmed that Moscow made the payment without using frozen reserves in the United States, adding that the exact source of the funds was unclear.
U.S. Deputy Treasury Secretary Wally Adeyemo told Reuters the payments diverted funds from Russia’s war effort in Ukraine and were a “sign of success” for U.S. sanctions policy.
He declined to comment on the future of a general Treasury license due to expire on May 25 that allows banks to process Russian debt payments.
“Our overarching goal is to try to starve Russia of the resources it uses both to sustain its economy and fund its war effort, and to stop its invasion of Ukraine. So we will continue to take policy decisions with that in mind,” Adeyemo said.
Russia said it had funneled the necessary funds to the London branch of Citibank, one of the “paying agents” whose job it is to pay them out to bondholders.
Citibank declined to comment.
“Payments were made in the currency of issue of the corresponding Eurobonds – in US dollars,” the Russian Finance Ministry said. “Thus, the service obligations of sovereign Eurobonds are fulfilled.”
Two bondholders said they haven’t received the funds yet, but the process can take days.
“I don’t see why they (the paying agent) can’t make this payment,” said Kaan Nazli, portfolio manager of the Emerging Markets Debt team at Neuberger Berman, which holds Russian sovereign bonds.
Russia’s Sberbank separately said it paid coupons on two subordinated ruble Eurobond issues because sanctions imposed by the United States and Britain prevented it from making payments to investors in accordance to its initial commitments.
Russia has not experienced any failure of any kind since the financial crash of 1998 and has not experienced any major international or “external” market failure since the aftermath of the Bolshevik Revolution of 1917.
The risk of another increases, however, as Western countries have imposed sanctions on Russia in response to its invasion of Ukraine, which Moscow has called a “special military operation” to disarm Ukraine and root out what she calls nationalists dangerous.
Interest payments were supposed to be paid earlier this month, but a 30-day “grace period” that government bonds often have in their terms meant Moscow’s final deadline was May 4.
Brokers said the announcement sent Russian government bond prices up by as much as 15 cents, nearly doubling their dollar value in some cases. Those belonging to still unlicensed large companies such as Gazprom, Lukoil and telecommunications company VimpelCom were also quoted up 2 to 5 cents.
CHART: Russian Roulette (default) https://graphics.Reuters.com/RUSSIA-DEBT/PRICES/byvrjneqdve/chart.png
BlueBay’s Tim Ash called Russia’s decision “rather extraordinary”, also pointing out that the key group of international banks and funds that judge whether a default has occurred had recently ruled that it had.
The prospect of Russia defaulting was almost unthinkable before its invasion of Ukraine. The billions of dollars it earns selling oil and gas around the world meant it had one of the lowest levels of public debt in the world and a huge stock of foreign exchange reserves.
However, Western sanctions froze much of those reserves and meant banks needed special waivers to make any Russia-related payments.
Andy Sparks, chief executive of index provider MSCI, said the prospect of default was still significant if the US Treasury allowed Russia’s debt payment license to expire on May 25.
Russia has another bond payment just two days after this one, which means that if the US waiver is not extended, it will be nearly impossible for Moscow to avoid a default.
“The real question is whether this just delays the inevitable,” Sparks said.
“Most investors will take this May 25 date very seriously and many will not expect this exception to be extended.”
Russian Roulette (default) https://tmsnrt.rs/39qVubj
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(Additional reporting by David Lawder in Washington, Davide Barbuscia and Rodrigo Campos in New York, Sujata Rao and Karin Strohecker in London; Editing by Toby Chopra and Daniel Wallis)