Russia is facing yet another bond payment test, and only days remain before it could default on its first foreign debt in over 100 years.
- Coupons worth $394m are due Thursday and Friday
- However, $100m has been locked and the deadline expires Sunday night
On Thursday and Friday, three interest transfers in excess of $400 million are due. But it is more urgent to meet a Sunday night deadline for previously missed payments that were made in May.
These funds, which amount to around $100 million in bond coupons, are locked by international sanctions. The grace period to resolve the problem expires on June 26, at midnight. Russia will be effectively in default at that point unless it manages to get payments through enough holders of the debt.
The government doesn’t lack the money or will to pay. Every week, billions of dollars in energy revenue flow into the Kremlin coffers.
It has failed to meet the deadlines, as mounting sanctions have cut off all avenues for cash transfer.
The White House’s goal is to punish Russia’s invasion of Ukraine and to seal its pariah status on the market for decades to follow the country’s first foreign default in over a century.
Russia claims it is being forced to default and has tried to find solutions. According to a decree signed in Putin’s favour, Russia will be deemed to have fulfilled its obligations once payments are made in rubles. This is a mechanism to service the bonds. Anton Siluanov, the Finance Minister, had stated earlier that the government would transfer rubles which could then be converted to foreign currency.
Siluanov stated last week that while we have done our best to get the horse to drink, it is up to us to decide if it does not want to.
The Finance Ministry’s efforts to pay and the latest coupons will dominate the attention of the public for the remainder of the week.
On Thursday and Friday, three coupon payments will be due. Failure to pay the coupon will result in the clock starting to tick on a grace period that lasts 30 days for the first two coupons and 15 days for the third.
Payments on notes due in 2027 or 2047 will be made first, starting June 23.
They do not have a clause that allows Russia to pay in rubles. However, they allow for alternate currencies such as euros, sterling, and Swiss Francs, according to bond documents. The Finance Ministry must notify bondholders at least five days before it plans to change to one of these currencies.
These payments, like coupons that are stuck to the coupon, must begin their journey to bondholders at Russia’s sanctioned National Settlement Depository. The money would be sent to Euroclear, international depositories, and then to the custodian banks around the globe where individual bondholders are able to access their accounts.
A $159 million payment due on June 24 is due on a note that matures in 2028 and has no other options than the dollar. It is unlikely that it will be approved since the US allowed a Treasury cut-out to allow Americans to receive Russia’s sovereign payments on May 25.
The bond’s designation indicates that the payment would be made via Russian financial infrastructure, with JPMorgan Chase & Co. acting as the paying agent.
