Russia Sends $650 Million Bond Payment In Rubles After US Treasury Blocks Dollars

The Russian Finance Ministry may have avoided technical default on Tuesday by sending $649.2 million in rubles to satisfy bond payments, after the US Treasury on Monday banned them from making dollar debt payments from accounts at US financial institutions.

File photo. Russian President Vladimir Putin (R) and Russian Finance Minister Anton Siluanov (L) speak during a meeting of the Supreme Council of the Eurasian Economic Union (EAEU), in St.Petersburg, Russia, 6 December 2018. [Pool/EPA/EFE]

The ministry said foreign banks had rejected USD bond payments for both April maturities and coupons on notes which come due in April 2042, leaving Russia no choice but to send rubles to the National Settlement Depository. According to ministry officials, Russia “considers it fulfilled its obligations in full.”

That said, neither of the bonds allows Russia the option to pay in rubles, according to Bloomberg, raising concern among investors that a technical default could be declared after a 30-day grace period.

“The default issue is tricky,” said Abdul Kadir Hussain, the head of fixed-income asset management at Dubai-based Arqaam Capital. “Russia can claim we are willing to pay, we have the money to pay, but banks are not letting us pay. I’m not sure how the courts would handle that.”

Earlier this year, rating firms S&P Global and Fitch said they would consider Russia to be in default if they satisfied payments on notes in a different currency than the one agreed upon, leading investors to load up on credit swaps and read the fine print on around $40 billion in contracts.

Russia’s Default Swaps Signal $40 Billion Payday Is Imminent

Credit-default swaps protecting $10 million of the government’s bonds for one year were quoted as high as $7 million upfront and $100,000 annually, according to market participants on Wednesday. That implies around 87% probability of default. -Bloomberg

The last time Russia defaulted on its ruble debt was 1998, two years before Vladimir Putin assumed power. 

One US Treasury insider told Business that bondholders can still get paid if Russia can find a way to send dollars without using immobilized funds in US accounts – however the Russian Finance Ministry’s announcement suggested that they wouldn’t be exploring other avenues, and would continue to pay in rubles.