Jorgelina do Rosario and Karin Strohecker

LONDON (Reuters – Russia’s sovereign default has moved back to the centre of attention with a U.S. deadline that allows Moscow to pay on May 25th and $100m in interest payments following.

Russia has been cut off from global finance by the severe sanctions that were imposed on it by the west in response to its February 24 invasion of Ukraine.

Russia so far has been able to avoid default by navigating the many measures taken and making payments on seven of its international bonds.

Moscow could be losing the key license necessary to transfer funds as soon as this expires.

These are the questions and answers to this issue

IS THE LILICENSE EXTENDED

The U.S. Office of Foreign Assets Control (OFAC) issued a license https://home.treasury.gov/policy-issues/financial-sanctions/recent-actions/20220302 on March 2 allowing for transactions between U.S. persons and Russia’s finance ministry, central bank or national wealth fund in relation to debt payments.

On Wednesday, May 25, the license will expire.

Washington’s extension seems increasingly distant. Janet Yellen (Treasury Secretary) stated that, although there had not been a final decision made by Washington, it was unlikely it would be continued.

What arguments are there for or against extended?

Supporters of Russia’s extension claim that Russia would be forced to repay its debts by allowing Moscow to borrow hard currency. This is after the country has lost roughly half its $640 billion foreign reserves.

The extension would mean that Russia will have to repay less than $2B on its foreign debts until the end of this year, according to opponents. This is a small amount compared with Moscow’s revenue from oil and gas, which soared to nearly $28 billion due to rising energy prices.

What are the PAYMENTS?

Interest payments for two Eurobonds will be due on May 27: $71 million for the 2026 dollar bond, and $29 Million for the 2036 euro bond.

Each has provisions that allow payment in other hard currencies, such as euros, dollars or pound sterling, and the rouble can also be listed for euro-denominated bonds. If the Russian Federation cannot make principal and interest payments in its original currency, then it can switch currency.

Although the premise is still being tested, experts think it would be hard for Russia to support that argument considering sanctions were in place as a result of its invasion.

Both bonds come with a 30-day grace period.

Next payment is $235 Million over two Eurobonds due June 23.

CAN RUSSIA PAY AND WHAT ARE THE REASONS?

Anton Siluanov (Finance Minister) stated that Russia would pay off its international debt in Russian roubles, if Washington does not allow it. Moscow also said that Russia is in no default since it has the money to repay its debts.

In order to avoid default, the funds must be paid in the correct currency and within the timeframe.

The case is very complex, said Ian Clark, a partner at White & Case, who thinks Russia might still be able to make the payments to the registered noteholders at the national securities depository in Russia, outside U.S. jurisdiction.

Clark stated that while it is possible for those payments to not be transferred onto other holders (including U.S. persons), Russia could have fulfilled its obligations and escaped default, at least in the short term. “The detail will prove to be the devil.”

Russia might make the payment in rubles, but it may do so before the May 25 deadline.

WHY IS RUSSIA DESPERATE TO AVOID A DEFAULT

Russia is able to pay its current debts with sufficient money, but it may eventually seek out financing from abroad.

    In a cease-fire scenario, the country will try to rebuild international economic ties that have been cut off during the war, said Chris Miller, Eurasia Director at Greenmantle and the author of “Putinomics: Power and Money in Resurgent Russia”.

Miller stated that a sovereign default could hinder access to capital markets for corporates, even those not sanctioned by the government. It would also increase borrowing costs.

Miller stated, speaking of Russia’s seven-year-old annexation and said that “if you are sitting at the Kremlin trying to be optimist, then you can tell yourself that commercial relations normalized fairly quickly after 2014.” But this might change.

It will take longer.

WHY DOES THIS DEFAULT WORK DIFFERENTLY?

Countries stop servicing their debt when there is little to no international reserve money and they are not able to get market access.

It is not the same. This is a different story.

Wouter Sturkenboom (strategist at) said that Russia has the luxury to run a large current account surplus. Northern Trust Asset Management. It is important that Europe does not buy oil. This would put tremendous pressure on Europe.