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Russia thinks it’s found a way around US dollar bond payment blockade


Russian Finance Minister Anton Siluanov (pictured here in 2019 alongside Russian President Vladimir Putin) said that Moscow would continue to pay its external debts in rubles. But, for payments to be received from Russia, Eurobond holders abroad will have to open accounts in Russian currency and ruble with Russian banks.

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Russia has a new method of circumventing U.S. Sanctions that block Moscow’s ability to pay its foreign investors dollar-denominated bonds.

After the historic default, the country will be in debt for the first time since then. U.S. Treasury Department last week allowed a key sanctions exemption to expire. Russia was able to make payments in dollars to foreign bondholders through U.S. or international banks under the waiver, thus avoiding default.

Russian Finance Ministry sent $100 million to its domestic settlement agency in interest payments for two Eurobonds. The money was wired in rubles by the Russian Finance Ministry. But if it doesn’t find its way into the accounts of bondholders overseas, it could constitute default.

The payments carry a 30-day grace period, after which Russia could be declared to have defaulted on its foreign currency debt for the first time since the Bolshevik revolution in 1917, despite the Kremlin claiming to have ample cash to pay — an unprecedented situation for a major economy.

The government is still due to pay $2 billion more in taxes before the end the year. Some bonds issued after 2014 may be paid in rubles, or in other currency, depending on the contract.

According to Russian media Vedomosti, Anton Siluanov, Russian finance minister, said Monday that Moscow would continue to pay external debts in rubles. However foreign Eurobond holders must open Russian ruble or hard currency accounts to receive payment.

He said that he was able to pay for the gas by paying in roubles. According to Reuters translation, he claimed.

Siluanov proposed that the settlement mechanism will work in the exact same way, but in an opposite direction. It would flow through Russia’s National Settlement Depository. The NSD isn’t currently under U.S. sanctions, unlike major Russian financial institutions.

On Friday, however, sanctions were imposed by the European Union against NSD. The NSD was intended to process the bond payment payments.

“The rope will run out”

BlueBay Asset Management senior emerging market sovereign strategist Timothy Ash told CNBC Wednesday that Russian authorities are not likely to grant foreign investors permission to open Russian accounts.

It’s not possible. “You’re referring about international companies. U.S. Banks, International banks. This is quite peripheral in the final,” he stated.

The process will cost them a mere couple hundred million dollars and they won’t be able to harm their reputation or expose themselves as compliance risk. They don’t wish to be caught under secondary sanctions by Americans.”

Ash also questioned whether Russia’s plan could prevent it from being declared in default by international agencies or ratings agencies. According to Ash, since all foreign investors won’t be paid because the Treasury Department Office of Foreign Assets Control has blocked any payments in rubles, it is unlikely that they will receive them.

“One of the ways or another, Russia is going to run dry,” he stated, noting that Russia might be in default since two coupons on OFZ-denominated ruble bonds have still to reach bondholders.

Further questions remain about how investors from foreign countries, individuals and institutions alike, might open accounts with Russian banks. Also, how can funds that are held at Russian financial institutions be repatriated, without violating any sanctions. It is possible that bondholders are unwilling to accept this chance, preferring to remain on the right side and comply with sanctions as they go through legal default proceedings.

CNBC’s Adam Solowsky told CNBC that bondholder consent is usually required in order to change the date, time or method of payment. However, non-participating holders could still have claims.

Contagion effect?

When asked, however Ash did not believe there would be an even greater contagion effect should Russia be declared bankrupt. This was in contrast to the Russian financial crises of 1998.

He said that in 1998, foreign exposure was at $60 billion in GKO (Russian Short-Term Zero-Coupon Government Bonds) and the equivalent in external debt markets. “So, it was bigger.”

Russia could stay in default if it enters default. It is because the nature of sanctions and the inability to resolve the crisis in Ukraine. Ash said that this could be why the Kremlin opposes the designation.

“The Americans have said ‘we want Russia to go into default’ so they can only come out of default when America says ‘we’re happy now, you can negotiate with bondholders, all is forgiven’ — so it will remain in default for a long time, so it’s very, very bad for Russia, bottom line,” he said.

They may be able to borrow money from someone, like the Chinese, even if they aren’t in default. Everything changes once they become in default. The Chinese wouldn’t be able to resist.”