Russia speeds up debt payments to avoid default

The skyscrapers of the Moscow International Business Center, also known as ‘Moskva-City’, are seen just after sunset in Moscow, Russia July 12, 2018. Picture taken July 12, 2018 REUTERS/Christian Hartmann

LONDON, May 20 (Reuters) – Russia sent funds on Friday to pay the interest on two of its international bonds to avoid a sovereign default before the expiration next week of a key U.S. license allowing such transfers.

The Ministry of Finance said it had channeled $71.25 million to pay coupons on dollar-denominated Eurobonds maturing in 2026 and 26.5 million euros ($28 million) on euro-denominated notes maturing in 2026. in 2036. Read more

Russia has faced the prospect of a sovereign default since Western capitals imposed sweeping sanctions following its February 24 invasion of Ukraine and Moscow introduced countermeasures. The country was virtually cut off from the global financial system and saw about half of its $640 billion in overseas reserves frozen.

Both payments were only due in a week, but Russia is relying on a license from the US Treasury to be able to transfer the money to international bondholders – a key element in avoiding a sovereign default.

This license expires on May 25.

“They’re kicking the box,” said Kaan Nazli of asset manager Neuberger Berman, which owns Russian sovereign bonds.

The country’s $40 billion in international bonds, about half of which are held by foreign investors, have become a flashpoint in recent months.

While Russia initially seemed keen to suspend payments to foreign investors unless it is allowed to use its frozen reserves abroad, that appears to have changed.

“The strategy turned into Russia not wanting to be the party to blame for the default,” Nazli said.

According to the Ministry of Finance, Russia’s national settlement depository – which acts as the paying agent on both bonds – had received the funds.

It was unclear whether the custodian would be able to channel the funds itself so they could reach foreign holders of Russian Eurobonds.

JPMorgan, which previously acted as correspondent bank for those payments, and the U.S. Treasury did not immediately respond to a request for comment.

Russian Finance Minister Anton Siluanov said Wednesday that Moscow would service its foreign debt in rubles if the United States blocked other options and did not declare default because it had the means to pay. Read more

EXPIRED LICENSE

Despite the plethora of brakes, Russia managed to make payments on seven bonds since its invasion of Ukraine before the last interest payments.

“We’re just switching between payments at the moment, and then at some point the music will stop,” a portfolio manager said on condition of anonymity.

But it looks increasingly unlikely that the US Office of Foreign Assets Control (OFAC) will extend the license Russia needs to make the payments. Treasury Secretary Janet Yellen said on Wednesday that while no final decision had been made, it was “unlikely to continue”. Read more

Those in favor of an extension argue that allowing Russia to service its debt would empty its war chest by forcing Moscow to use its hard currency earnings to make payments to creditors.

Opponents say Russia must pay less than $2 billion on its foreign debt until the end of the year, a pittance compared to Moscow’s oil and gas revenues of nearly $28 billion alone. in April thanks to high energy prices.

The next payments after the May 27 payment are $235 million on two Eurobonds due June 23.

“If OFAC fails to extend the license, Russia will eventually and inevitably be forced into default,” said Tim Ash of BlueBay Asset Management.

Reporting by Karin Strohecker, additional reporting by Marc Jones and Jorgelina do Rosario in London, Michelle Price in New York, Editing by Nick Macfie and Hugh Lawson

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