Russia sets up new bond payment system to circumvent US sanctions, as it tries to avoid historic default

Russian Finance Minister Anton Siluanov announced the new system.Document/Getty Images

  • Russia is setting up a new bond payment system as it tries to circumvent US sanctions, a Moscow newspaper has reported.

  • The new system will be a mirror image of the one currently in place to manage natural gas exports, according to Vedomosti.

  • Investors will be asked to open two accounts in a Russian bank: one in rubles and one in foreign currency.

Russia is considering setting up a new system to manage its foreign bond payments in a bid to avoid a historic default, according to a report in a Moscow newspaper.

The new system would be a mirror image of the one Russia has in place to manage natural gas exports, Vedomosti reported on Monday, citing Finance Minister Anton Siluanov.

As part of the bond payment system, investors will need to open a foreign currency and ruble account in a Russian bank and provide instructions to enable the exchange, Siluanov said.

The system would allow Russia to make its bond payments in rubles, which would then be exchanged, allowing the investor to receive payment in the correct currency.

“Now we are finalizing this mechanism, we will discuss it in the government. After that, we will make an offer to our investors,” Siluanov said.

Russia has maintained payments on its foreign currency obligations since its invasion of Ukraine in late February, despite widespread expectations that it would default for the first time since 1918.

But his task became more difficult last week, when the US Treasury let a key sanctions waiver expire. The move means U.S. institutions cannot receive bond payments from Russia without breaching sanctions.

Siluanov told Vedomosti that the new payment system would allow Russia to bypass the entire settlement infrastructure of the Western financial system. Payments would be made only through Russia’s National Settlement Repository.

The finance minister said on state television on Friday that Russia would make payments on euro-denominated bonds in euros because the EU had not banned the payments, Bloomberg reported.

However, the United States has made it clear that it wants to make life difficult for Russia and so Western investors may be reluctant to accept the plans, said Timothy Ash, strategist at BlueBay Asset Management.

“If you’re a European bank with significant operations in the United States, you’ll likely refuse for fear of being implicated in secondary US sanctions,” he told Insider.

Russia had $100 million in foreign bond payments due last week, in euros and dollars. Bloomberg said they did not arrive in investors’ accounts on Friday.

The government has more than $1.8 billion in bond payments to make this year, according to a list compiled by JPMorgan analysts.

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Elaine R. Knight