Russia nears debt default, pays bondholders in rubles

A view shows Russian ruble coins in this illustrative photo taken March 25, 2021. REUTERS/Maxim Shemetov/Illustration/File Photo

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  • Payment for Russian bonds was due in US dollars on Monday
  • The US Treasury has suspended debt payments from frozen reserves
  • Credit default swaps in Russia rise sharply
  • International creditors face strict capital controls
  • US announces new sanctions against banks and officials

LONDON, April 6 (Reuters) – Russia moved closer to a potential default on its international debt on Wednesday by paying its dollar bondholders in rubles and said it would continue to do so as long as its reserves of exchange would be blocked by sanctions.

The United States on Monday prevented Russia from paying holders of its sovereign debt more than $600 million from frozen reserves held in U.S. banks, saying Moscow had to choose between emptying its dollar reserves at home or defaulting. Read more

Russia has not defaulted on its foreign debt since reneging on payments due after the 1917 Bolshevik Revolution, but its bonds have resurfaced as a flashpoint in the diplomatic crisis and tit-for-tat sanctions -state between Moscow and Western capitals.

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“It speeds up the timeline when Russia runs out of space on the willingness and ability to pay,” a fund manager holding one of the bonds due said on Monday.

The Kremlin said it would continue to pay its debt.

“Russia has all the necessary resources to service its debts (…) If this blockade continues and payments for debt service are blocked, it (the future payment) could be made in rubles “said Kremlin spokesman Dmitry Peskov.

Moscow managed to make a number of foreign currency coupon payments on some of its 15 international bonds with a face value of around $40 billion before the United States halted those transactions. Read more

Russia’s Finance Ministry said on Wednesday it had to pay rubles to holders of its dollar-denominated Eurobonds maturing in 2022 and 2042 because a foreign bank refused to process a $649 million payment order to holders of its sovereign debt.

The finance ministry said the foreign bank, which it did not name, rejected Russia’s order to pay coupons on the two bonds and also did not proceed with the payment of one euro. – bond maturing in 2022.

Russia’s ability to meet its debt obligations is in focus after sweeping sanctions in response to what Moscow calls a ‘special military operation’ in Ukraine froze nearly half of its reserves and limited access to global payment systems.

‘ARTIFICIAL SITUATION’

JP Morgan, which handled payments on Russian sovereign bonds as a correspondent bank, was blocked by the US Treasury from making the two payments due on Monday, a source familiar with the matter said. Read more

JP Morgan (JPM.N) declined to comment.

Russia may consider allowing foreign holders of its 2022 and 2042 Eurobonds to convert ruble payments into foreign currencies once access to its foreign exchange accounts is restored, the finance ministry said.

Until then, the ruble equivalent of Eurobond payments to bondholders from supposedly hostile countries will be kept in special type “C” accounts at Russia’s National Settlement Repository, the ministry added. .

Both bonds were issued in 2012 and stipulate payment in US dollars – unlike some bonds which were sold later and allow payment in alternative currencies such as the Euro, British Pound, Swiss Franc or even the ruble.

Russia has a 30-day grace period to make the payment in dollars, but if the money does not appear in the bondholders’ account within that period, it would constitute a default, the credit agencies said. global ratings.

Moscow introduced strict capital controls to shore up its currency in the aftermath of the war, which, combined with financial sanctions, prevent foreign investors from repatriating any payments.

The default warnings flashed brightly again on Wednesday.

One-year credit default swaps – a way to insure exposure to Russia’s sovereign debt – jumped 60 points to 69 points, according to IHS Markit.

Longer-dated Russian dollar bonds, which have all but ceased trading, were trading at well below 20 cents to the dollar, while euro-denominated issues were offered at 15 cents. ,

Russia dismissed this as a default situation.

“In theory, a default situation could be created, but it would be a purely artificial situation,” Peskov said. “There is no reason for a genuine default.”

Bondholders had been tracking bond payments since the sweeping sanctions and Moscow countermeasures that severed Russia from the global financial system.

Russia on Wednesday paid coupons on four OFZ ruble treasury bills. These were once popular for their high yields among foreign investors, who can no longer receive payments due to Russian sanctions and retaliation.

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Reuters reporting; Additional reporting by Jorgelina do Rosario in London; Editing by Hugh Lawson, Alexander Smith and Lisa Shumaker

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