Russia has to change debt service: default is imminent

Russland braces itself against the first payment default after the October Revolution in 1917. But this becomes difficult after the American Treasury Department forbade creditors from accepting interest payments and repayments from the Russian state last week. In an interview with Vedomosti newspaper on Monday, Russian Finance Minister Anton Siluanov presented his plan on how foreign investors can continue to be served on their Russian foreign currency bonds. The model for gas payments serves as a model. This model came into force at the end of March.

“How do the ruble payments for gas work: Foreign currency is transferred to us and here, on instruction, it is exchanged for rubles and settled in this way. The clearing mechanism for Eurobonds works the same way, just in reverse,” the Russian finance minister said in the interview. Accordingly, holders of foreign currency bonds must open an account with a Russian bank. The Russian state then pays the amounts due in rubles, which are then converted by the institute into dollars or euros. The creditors then receive their interest or repayments in the currency in which the respective bond was issued.

The scheme for gas payments goes in the other direction: here buyers from European countries need to open an account with the state Gazprombank. There they pay for the deliveries in euros, which Gazprombank forwards in rubles to the state-owned gas company Gazprom.

Kremlin wants to bypass western payment systems

According to Siluanov, the new debt-servicing model is designed to bypass Western payment systems. Since the attack on Ukraine, the Western states have imposed extensive financial sanctions with the aim of isolating Russia as much as possible on the international financial markets. The balances of the Russian central bank at central banks and commercial banks abroad were frozen. According to earlier information from Siluanov, around $300 billion will be affected, about half of Russia’s foreign exchange reserves. In addition, Russian banks were excluded from the international payment system Swift.

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The United States have recently tightened the screws. With the ban on creditors accepting payments from the Russian state, a technical default is getting closer. The US Treasury had previously ordered Western correspondent banks to stop forwarding Russian payments.

Moscow again behind schedule

Despite this, in early May the Kremlin managed to make payments due of $650 million on two bonds. Russia was in default here, but the payment was made before the 30-day deadline from the original payment date. Only then do rating agencies determine the default. Moscow is now behind schedule again. Interest coupons in euros and dollars totaling $100 million had to be paid on Friday. But so far the bondholders are waiting for it.

Russia has yet to pay around $1 billion for its foreign currency bonds by the end of the year. The titles are traded on the market at only a fraction of their original value. The two titles not served on Friday are currently trading at less than 20 percent of the nominal value (100 percent).

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