Russia faces renewed threat of debt default on May 4, according to major ratings agencies, as the grace period comes to a close after it attempted to service its dollar bond payments in Russian rubles.
Mikhail Tereshchenko | Sputnik | via Reuters
Russia looks to have averted a historic sovereign default on Friday by tapping its domestic reserves and attempting to make overdue dollar payments on its international debt obligations.
Earlier Friday, Russia’s Finance Ministry said that it had attempted the dollar payments — a dramatic U-turn after the country had previously attempted to make the payments on its dollar-denominated bonds in Russian rubles.
The ministry said it had made a payment of $564.8 million on a 2022 eurobond and a payment of $84.4 million on a 2042 eurobond, according to Reuters, with both in dollars — which was originally stipulated on the debt agreements.
The funds have reportedly been channeled to the London branch of Citibank but it’s unclear whether they will reach their intended recipients. The payments were due to be made in April and had entered a 30-day grace period before official default on May 4.
Russian government bonds rallied on Friday afternoon after the news from the Finance Ministry. But close Moscow watchers like Timothy Ash, emerging markets strategist at BlueBay Asset Management, were unsure whether it would still be able to avoid a default.
“CDS committee [credit derivatives determinations committee] already ruled default so this is pretty extraordinary … bonds rallying hard … insane,” he said in a flash note Friday afternoon.
A senior U.S. official said later on Friday that Russia had not mobilized money through the U.S. system and the payments involved fresh funds.
“The main concern was are they going to use funds that were immobilized in the U.S. or use the money they have been using to prop up the ruble and the war effort. It appears it came from that pile of money because we didn’t authorize any transactions involving the immobilized funds in the U.S.,” the official said, according to Reuters.
A spokesperson for the Treasury Department’s Office of Foreign Assets Control, or OFAC, was not immediately available for comment when contacted by CNBC.
Assets frozen
Around half of Russia’s vast foreign currency reserves have been frozen by punitive economic sanctions imposed by international powers in the wake of its invasion of Ukraine.
On April 4, Russia made a payment on the two sovereign bonds that are due to mature in 2022 and 2042 in the local currency rather than in dollars as mandated under the terms of its contract.
In a recent statement, ratings agency Moody’s said this deviation from the payment terms relative to the original bond contracts may be considered a default if not remedied by the end of the monthlong grace period on May 4.
“The bond contracts have no provision for repayment in any other currency other than dollars. Although eurobonds issued after 2018 allow under certain conditions for…
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