Russia Skirts Nearer Default After Dollar Bond Payment Blocked

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(Bloomberg) — Russia’s Finance Ministry paid rubles for some of its dollar debt obligations due this week after foreign banks declined to process $649.2 million of payments, raising speculation over a potential technical default.

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The ministry said foreign banks rejected payments for bonds maturing this month and for a coupon on notes due April 2042, leaving Russia to send ruble payments to the National Settlement Depository.

The finance ministry added that it “considers it fulfilled its obligations in full.”

However, neither security allowed Russia the option to pay in rubles, according to bond documents, raising investor concern that the country is at risk of a default. Both notes have a 30-day grace period, data compiled by Bloomberg show.

“The default issue is tricky,” 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.”

Will Russian Bonds Default? Investors Keep Watch: QuickTake

The U.S. and the European Union imposed tough financial sanctions on Russia after President Vladimir Putin invaded Ukraine late February, hampering its ability to transfer payments to bondholders. While Russia thus far sidestepped its first external default in a century, the U.S. Treasury’s move this week to halt dollar debt payments from the country’s accounts at U.S. banks has reignited investor concerns.

Russia’s Effort to Avoid Default Undermined by New U.S. Sanction

In Default?

Rating firms S&P Global and Fitch Ratings said earlier this year that they would consider Russia being in default if it paid notes in a different currency than the one agreed. Both firms announced they would withdraw ratings from Russia’s sovereign and corporate debt following restrictions by the European Union that limited their ability to provide such ratings.

As a default by Russia becomes increasingly probable, investors have been loading up on credit swaps tied to the country, while also scrambling to read the small print on about $40 billion of the 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.

Russia defaulted on its ruble debt in 1998. When Putin assumed power in 2000, he pushed the government to keep debt levels low and strive for disciplined fiscal management.

If Russia gets access to its foreign-currency accounts, it will create grounds for the authorities to allow conversion of these rubles into foreign currency, the Finance Ministry said in the statement.

(Updates with details throughout.)

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