Russia makes bond payment in dollars to avoid default

The nearly $650 million in payments were made in dollars at a London branch of Citigroup Inc.

which processes payments on behalf of bondholders, the Russian Finance Ministry said on Friday.

Money from Russia’s bond payments is due to 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 be officially called into default by its creditors.

The decision to pay in dollars marked a reversal, as the Russian Finance Ministry had previously insisted on making bond payments in roubles.

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

The payments did not require authorization from the US Treasury because the Kremlin is allowed to make payments from non-US accounts through US financial institutions until May 25, a US official said.

Citigroup will ensure that processing payments to Euroclear, the clearinghouse responsible for sending payment to bondholders, complies with US and UK sanctions, according to a person familiar with Citi’s thinking.

Moscow has sufficient resources to service its debt through 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 US banks to pay off its foreign debts.

The purpose of this policy change was not to default Russia on its foreign debts, but to force the country to spend its available dollars on debt payments rather than fund the conflict in Ukraine, the official said. American official.

The consequences of the harsh economic sanctions against Russia are already being felt around the world. The WSJ’s Greg Ip joins other experts in explaining the significance of what has happened so far and how the conflict could transform the global economy. Photo illustration: Alexandre Hotz

Faced with the blocking of the Biden administration, the Russian Ministry of Finance tried in April to return the funds owed to creditors through its correspondent bank, JPMorgan Chase..

But the bank refused to process the payments because the US Treasury did not give its 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 both obligations, payments must be made in dollars. An industry body overseeing swap contracts that insure against default on Russian dollar bonds recently ruled that the Kremlin would not meet its obligations by paying its creditors in rubles. Credit rating agencies have also said that ruble payments are not sufficient and will lead to default.

By backing down and paying in dollars, Russia apparently hopes to avoid the complex consequences and ripple effects that could result from a declaration of default. A default could also remind Russia of the country’s default in 1998, which triggered a series of bank failures and a painful economic crisis, and complicate the country’s access to capital markets once the war is over.

Russia is not out of the woods yet. Payments still have to be processed by Citigroup’s London branch, and UK sanctions against the Russian government could potentially hamper the receipt of funds by creditors, according to one of the people.

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

The weeks’ delay in delivering its final dollar payment could have reflected the time Russian officials needed to figure out how to circumvent sanctions complications, said Dennis Hranitzky, head of the firm’s sovereign litigation practice. of attorneys Quinn Emanuel Urquhart and Sullivan, LLP. .

“Heightened penalties came into effect just as the payment was due and that might have caught them off guard,” he said. “They may have needed more time to make the payment…I’m not sure that represents a change of heart.”

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

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