Russia is inching closer to a technical default on its international debt after foreign banks declined to process payments of more than $600 million this week.
The United States prevented Moscow from completing dollar-denominated debt payments to bondholders from reserves parked at U.S. banks, noting that the Kremlin had to choose between exhausting its dollar reserves, generating more revenues, or slipping into default.
“The U.S. Treasury prohibited Russia from making debt payments with funds subject to U.S. jurisdiction,” the White House said. “Sanctions do not preclude payments on Russian sovereign debt at this time, provided Russia uses funds outside of U.S. jurisdiction. However, Russia is a global financial pariah—and it will now need to choose between draining its available funds to make debt payments or default.”
A $552.4 million principal payment maturing in 2022 and an $84 million coupon payment on a 2042 sovereign dollar bond were due on April 4.
JPMorgan Chase, one of the correspondent banks involved in facilitating these payments, was prevented from fulfilling its duties by the U.S. Treasury Department earlier this week.
Russia has a 30-day grace period to proceed with a dollar-denominated payment. Global rating agencies warn that if the funds don’t appear in bondholders’ accounts, it would be classified as a technical default.
Last month, Fitch Ratings and S&P Global noted that if Russia makes principal and coupon payments in a currency other than the one agreed to, they would also determine Russia to be in default.
Moscow has 15 foreign bonds worth approximately $40 billion outstanding. Despite the myriad of economic sanctions and financial restrictions imposed on Russia for its invasion of Ukraine, the country has continually serviced the government’s foreign currency debts, including coupon payments on its Eurobonds.
Russia also completed coupon payments on four OFZ treasury ruble bonds. Global investors had traditionally poured into these investment vehicles because of the high yields, but the sanctions prevented them from receiving payments.
Officials insist that the nation will keep up with its obligations. But moving forward, the Russian government promised that its future payments could be completed in rubles. Moscow is also considering a plan that would let foreign holders of its 2022 and 2042 Eurobonds convert ruble payments into foreign currencies if the country can reaccess foreign accounts.
‘An Artificial Default’
Market strategists say that President Vladimir Putin will need to consider his options if he wants to avert a default, something that could have long-term consequences for the Eastern European economy.“Putin will need to think long and hard now whether he wants to avoid a formal default on external debt, which will have negative consequences for the Russian economy for years to come,” Timothy Ash, an emerging markets strategist at BlueBay Asset Management, wrote in a research note.
“In reality, unless Putin withdraws from Ukraine, it is hard to see Russia avoiding default here, unless it does something like transport planes of physical cash dollars or gold West, but even then it’s hard to see any international bank being willing to provide for settlement for bondholders to avoid default. And indeed whether international bondholders would want to accept settlement.”
But any defaults would only be “artificial,” says Kremlin spokesperson Dmitry Peskov, telling reporters on a conference call that Russia possesses sufficient resources to cover its obligations.
“Significant amounts of our reserves are frozen in foreign countries, as you know. So if they continue to be blocked in this way and if transfers from the frozen amounts are then also blocked, then they will be serviced in rubles,” Peskov said.
“In other words, there is no basis for a real default. There are none, not even close.”
The Treasury had previously stated that sanctions didn’t prohibit Moscow from executing foreign debt payments. They would be permitted until May 25, when an exemption is scheduled to expire.
In total, Western sanctions have frozen about two-thirds of Moscow’s more than $600 billion in reserves. Last week, its reserves decreased by nearly $39 billion, according to the central bank.
ICE Data Services figures suggest that the price of insuring the country’s debt against default swelled to 87.7 percent on April 5, projecting that Russia will miss its debt payments within five years.
“Russia has the money to service its debt, but cannot access it,” she said.
These sanctions also ban new investment in Russia, install full blocking on crucial state-owned enterprises, and freeze the assets of Sberbank and Alfa-Bank, the largest financial institutions in the country.
Even with Russia prohibited from international markets, the ruble has held steady, returning to its pre-invasion level and climbing nearly 40 percent against the dollar over the last month.
The U.S. Treasury Department didn’t respond by press time to a request by The Epoch Times for comment.
