Marc Jones, Andrea Shalal

LONDON/WASHINGTON – Russia appeared to have made a sudden u-turn on Friday to avoid default. It paid a few of its international debts in dollars, despite having previously promised that they would be paid only in roubles, provided it kept its reserves frozen.

Russia’s 40 billion international bonds are now the focus of the financial game of financial tite-fortat about possible default.

Russia’s finance minister said that it was able to make payments of $564.8 Million on 2022 Eurobonds and $84.4 Million on 2042 bonds in dollars.

Although a top American official confirmed Moscow’s payment with no use of its frozen reserves, the official added that it was not clear where the funds came from.

According to the U.S., the official claimed that transactions with immobilized U.S. money were not authorized. They kind of gave in to this request to avoid default. That’s good.

Russia’s ministry claimed that the funds had been channeled to Citibank London Branch, which is one of the paying agents for the bonds. Its job it to distribute the funds to those investors who initially lent them the money.

Citibank refused to comment.

“The payments were made in the currency of issue of the corresponding Eurobonds – in U.S. dollars,” the Russian Finance Ministry said in a statement. Thus, obligations to serve sovereign Eurobonds have been fulfilled.

The two holders of bonds in limbo said that they have not received their funds yet. However, the process could take several days.

It is not clear what the paying agent will do right now…but I don’t see why they shouldn’t pay that amount,” Kaan Nazli said, portfolio manager of the Emerging Markets Debt group at Neuberger Berman. He also holds Russian sovereign bonds.

BONDS SOAR

Since 1998’s financial crash, Russia has never experienced any type of default. It has also not suffered an international or “external” market failure since 1917 Bolshevik revolution.

But, there is a risk that another one will emerge. This flashpoint comes in an economic spat with Western countries. They have imposed sanctions on Russia as a reaction to the invasion of Ukraine by Moscow. 

Although the bonds were supposed to be paid sooner this month, Moscow was given an additional 30-day grace period that many government bonds have. Moscow had until May 4, after which time they would not pay any more.

According to brokers, the announcement caused Russian bond prices to rise as high as 15 cents. This could almost double their dollar value. The prices of those belonging to large, yet unrecognized companies like Gazprom (MCX :), Lukoil (NASDAQ 🙂 and telecoms company VimpelCom(NASDAQ 🙂 also rose 2-5 cents.

BlueBay’s Tim Ash stated that it was an “extraordinary” act from Russia, pointing out that the international key bank and fund group that decides whether defaults have occurred had already ruled in Russia’s favor.

Before the invasion of Ukraine, Russia’s default was nearly unthinkable. It has one of the lowest levels of government debt and a large currency reserve because of its billions in oil and gas sales around the globe.

However, Western sanctions have frozen large amounts of these reserves. Other sanctions have meant that banks need special dispensations in order to make Russian-related payments.

Andy Sparks (managing director, MSCI Index Provider) said that the risk of default was still present as an authorization Washington granted to permit Russian debt payments processing would expire on May 25,

Russia will receive another bond payment within two days. This means that Moscow would have to pay the U.S. waiver in full if it isn’t extended.

Sparks stated that the real question was whether Sparks is delaying the inevitable.

“Most investors will treat May 25, 2005, very seriously. Many won’t expect the exception to be extended.”

Russian (default) roulette https://tmsnrt.rs/39qVubj

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Reporting added by Rodrigo Campos, Sujata Rao, and Karin Strohecker (New York), Editing done by Toby Chopra