Russia moved one step closer to a possible foreign currency default on Wednesday after the country’s Finance Ministry said it was forced to pay dollar bondholders in rubles.
The decision to pay in Russian currency comes after the US Treasury Department blocked US banks from processing dollar payments from Russia, halting $649 million in interest and principal due on Monday. JPMorgan, the so-called correspondent bank responsible for processing the transaction, refused to process the cash after seeking guidance from US authorities, according to a person familiar with the matter.
“Due to the unfriendly actions of the US Treasury Department. . . The Russian Ministry of Finance was forced to engage a Russian financial institution to make the necessary payments,” the ministry said in a statement on Wednesday. Instead, payments will be made to Russian ruble accounts, and the proceeds can be converted to dollars after “restoring access to the Union’s foreign currency accounts.” Russian state,” it added.
The move is in response to Russia’s earlier threat to pay its debt in rubles if Western sanctions prevent it from receiving dollars to bondholders. Foreign investors often view such a step as a near-default, which would be Moscow’s first since the 1998 Russian debt crisis. Ratings agency Fitch said last month An attempt to make interest payments in US dollars in the Russian currency would indicate “that a default or similar default process has begun”.
However, Kremlin spokesman Dmitry Peskov on Wednesday reiterated that the freezing of foreign exchange reserves following Russian President Vladimir Putin’s invasion of Ukraine in February was an attempt to push the country to “default”. artificial”.
“Russia has all the necessary resources to pay its debts,” Peskov told a meeting with journalists.
“As you know, a significant amount of our reserves are frozen overseas. So if they continue to be blocked in this way, and if the transfer from the frozen amount is subsequently also blocked, then they will be served in rubles,” said Peskov.
“In other words, there is no basis for an actual default. No, not even close. ”
Some Russian foreign currency bonds have terms in their small print that allow payments in rubles if they cannot be done in dollars or euros, but dollar bonds mature on Monday and a month later. Bonds maturing in 2042 that will pay a coupon on Monday are not among them.
A holder of a Russian dollar bond said he does not think it is possible to set up a “class C” account at a Russian bank needed to receive payments in rubles without sanctions. .
“If bondholders don’t get their money, their perception will be default,” said Cristian Maggio, head of emerging markets portfolio strategy at TD Securities. “But the Russians argued that they were willing to pay. This is a highly unusual situation and could eventually lead to legal action in a number of different jurisdictions where investors hold bonds. “
