Russia Makes Bond Payment In Dollars To Avoid Default

The money from Russia’s bond payments must land in bondholders’ accounts by Wednesday, the end of a 30-day grace period after Russia missed a payment in early April. Otherwise, the country can officially be called in default by its creditors.

The move to pay in dollars marked a reversal, as Russia’s finance ministry had earlier insisted on making the bond payments in rubles.

Russia made the payments from bank accounts that were not subject to direct sanctions, according to people familiar with the matter. The payments came through Dom.rf, a Russia-based housing bank not under U.S. sanctions, which then sent the money to correspondent bank BNY Mellon, according to one of the people. BNY Mellon then sent the money onto Citigroup, the payment agent for the two bonds, the person said.

The payments did not require authorization from the U.S. Treasury since there is a carveout for the Kremlin to make payments that originate from non-U.S. accounts through U.S. financial institutions until May 25, a U.S. official said.  

Citigroup will ensure that processing the payments onwards to Euroclear, the clearinghouse responsible for sending the payment onto bondholders, is in compliance with both U.S. and U.K. sanctions, according to a person familiar with Citi’s thinking.

Moscow has ample resources to service its debt thanks to oil and gas revenues. But Western sanctions have complicated the country’s efforts to make sovereign bond payments. In early April, the Biden administration blocked Russia from using U.S. banks to make good on foreign debt payments. 

The aim of that policy shift wasn’t to make Russia default on its foreign debts, but to force the country to spend its available dollars on debt payments rather than funding the conflict in Ukraine, the U.S. official said.

Faced with the Biden administration’s blockage, Russia’s finance ministry in April tried to remit funds owed to creditors through its correspondent bank, JPMorgan Chase. But the bank declined to process the payments because the U.S. Treasury didn’t grant approval. Russia then said it had paid the bondholders in rubles, after which it said it considered its obligations fulfilled.

Foreign creditors saw the situation differently. Under the terms of both bonds, payments must be made in dollars. An industry body overseeing swap contracts that insure against default on Russia’s dollar bonds recently ruled that the Kremlin would fail to meet its obligations by paying creditors in rubles. Credit ratings agencies have also said that ruble payments aren’t sufficient and would lead to default.

By backing down and paying in dollars, Russia is apparently hoping to avoid the consequences and complex ripple effects that could result from being declared in default. A default could also bring back memories in Russia of the country’s 1998 default, which triggered a rash of bank failures and a painful economic crisis, and complicate the country’s access to capital markets once the war has ended.

Russia isn’t out of the woods yet. Payments still need to be processed through Citigroup’s London branch, and U.K. sanctions on the Russian government could potentially get in the way of creditors’ receipt of funds, according to one of the people.

Russia has stayed current on its foreign debts since the beginning of the conflict with Ukraine, but the latest payments were the first to come after the Biden administration’s roadblocks, which severely complicated Russia’s ability to service its debt.

The weekslong delay in making its latest dollar payment could have reflected the time that Russian officials needed to figure out how to get around the complications of sanctions, said Dennis Hranitzky, head of the sovereign litigation practice at law firm Quinn Emanuel Urquhart and Sullivan, LLP.

“Tightened sanctions went into effect the same time that payment was due and that could have caught them off guard,” he said. “It may have been that they needed additional time to make the payment… I’m not sure it represents a change of heart.”

Write to Alexander Saeedy at [email protected] and Alexander Osipovich at [email protected]