Russia says bond payments sent in default stand-off

Russia’s finance ministry said on Thursday it made $117mn in interest payments due on its dollar-denominated bonds to Citi in London, but it was not clear whether the payment would be able to reach investors and allow Russia to avoid defaulting on its $38.5bn of foreign debt.

The ministry added that it would comment later on whether Citi — the payment agent for the bonds — had accepted the payment. The coupon payments were due on Wednesday, and Russia will default if it fails to pay up after a 30-day grace period. One European bondholder said on Thursday morning that he had not yet received the money. Citi declined to comment.

Moscow has repeatedly claimed that western sanctions are preventing it from servicing its debt, with finance minister Anton Siluanov saying earlier this week that Russia was being forced into an “artificial default”. US sanctions, however, say that US investors can continue receiving interest payments from the Russian finance ministry or central bank until May 25.

“The whole thing is weird,” said one emerging markets bond fund manager. “It’s quite clear payment could be made if they really wanted it to be. The US regulations contain a clear exemption for coupon payments.”

Russian foreign-currency bonds rallied on Thursday, extending gains which began on Wednesday when the Financial Times reported that Russia and Ukraine had made progress on a tentative peace plan. A dollar bond maturing in 2043 — one of the two with coupon payments due — rose to 40 cents on the dollar from 38 cents on Wednesday. A week ago it traded at less than 20 cents.

Investors and rating agencies had widely anticipated Russia would default on its foreign debt after western sanctions over the war in Ukraine froze about $300bn of Moscow’s $640bn currency reserves. Siluanov has also said it would be “absolutely fair” for the Russian government to make payments on its dollar debt in roubles until these sanctions are lifted.

Although some of Russia’s dollar bonds contain a clause allowing repayment in roubles, the two bonds due with coupons on Wednesday are not among them. Fitch Ratings said earlier this week that payment in the Russian currency would constitute a default.

A default would be Russia’s first since 1998, when a shock devaluation of the rouble and restructuring of Moscow’s local debt sent shockwaves through global markets. Then, Russia also defaulted on some Soviet-era dollar debt, but kept up payments on foreign-currency bonds issued since the fall of the Soviet Union. The last complete external default came in 1918 when the Bolshevik regime refused to recognise Tsarist-era debts.