Russia could be headed for its first default on foreign-currency debt in more than a century if its attempt to pay the interest on bonds in dollars fails.
While the $117 million coupon payments on two dollar securities due Wednesday are being processed, Finance Minister Anton Siluanov reiterated that there’s a risk the transfer in greenbacks won’t go through. Russia has sent the instruction for the payment to the U.S. bank that normally handles the transactions, but the ministry hasn’t received either a rejection or a confirmation, he was cited as saying by the RIA Novosti news service.
If the transfer fails, then the payment will be made in rubles, he said earlier this week. Fitch Ratings said on Tuesday that making a settlement in any currency other than the dollar within the 30-day grace period would be considered a default. S&P Global Ratings made a similar statement earlier this month.
The coupon payment could prove to be yet another turning point for Russia, which in the weeks since its invasion of Ukraine, lost its investment-grade ratings and has become the world’s most-sanctioned nation. Russia’s finance minister has repeatedly warned that without access to its foreign reserves, it’ll make the payment in rubles, outlining a process that involves transferring the cash into local accounts.
“The situation remains fluid for now, as has been the case since sanctions have been coming through,” said Antoine Lesne, head of ETF strategy and research for State Street’s SPDR, which holds the bonds.
Sudden Bounce
To be clear, U.S. sanctions don’t prohibit Russia from servicing dollar bonds, at least until May, according to a Treasury spokesperson.
The Treasury’s guidance said that U.S. persons were authorized “to receive interest, dividend, or maturity payments on debt or equity of the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, and the Ministry of Finance of the Russian Federation through 12:01 a.m. eastern daylight time on May 25, 2022.”
It’s unclear if or when a payment in dollars would be blocked. If it is, and Russia settles the coupons in rubles, that would be particularly problematic for these two securities, because neither of them have ruble fallback options that would’ve allowed settlements in the local currency. Some of Russia’s Eurobonds have that option.
All of the dollar bonds, including those with coupons due on Wednesday, rallied across maturities and the cost of insuring the debt fell on optimism that talks between Moscow and Kyiv to end the war are progressing.
If Russia doesn’t pay the coupon in dollars before the 30-day grace period expires, then creditors would have the right to declare default. It would be the nation’s first default on foreign-currency bonds since the Bolsheviks refused to service or recognize the czar’s debts a century ago. In 1998, Russia defaulted on local-currency debt and declared a moratorium on payments for its foreign-currency bonds.