With only a few days left, Russia might likely enter its first foreign default in a century. This week, Russia faces another bond payment test.
On Thursday and Friday, three interest transfers totaling over $400 million are due, but a deadline of Sunday night for previously missed payments from late May is more urgent.Due to international sanctions, those funds—roughly $100 million in bond coupons—are blocked, and the grace period to find a solution expires at the end of the day on June 26. Unless it finds a way to make payments to enough debt holders, Russia will then effectively be in default.
It's not that the government is unwilling or unable to make payments. Each week, the Kremlin receives billions of dollars in energy revenue.
Instead, it has fallen short of the deadlines because growing penalties are closing off channels for money transfers.With the nation's first international default since the Bolshevik revolution more than a century ago, the White House hopes to punish the Kremlin for its invasion of Ukraine by cementing its pariah status in the market for decades to come.
Russia has attempted to develop workarounds and claims that it is being forced into default. According to a proclamation signed by President Vladimir Putin outlining a procedure for servicing the bonds, it claimed that once payment is received in rubles, its responsibilities will be judged to have been met. The government would transfer rubles that may later be changed into foreign currencies, according to earlier comments from Finance Minister Anton Siluanov.
Siluanov said last week, "We've done everything we can to guide the horse to water, but it's not up to us whether it wants to drink or not."
The latest coupons that are due and the Finance Ministry's efforts to make payments will be the focus of discussion for the remainder of this week.On Thursday and Friday, there are three coupon payments due. If payment is not received, a grace period of 30 days for the first two and 15 business days for the final two will begin to run.
Close-Up of Coupon
First up are payments for notes with maturities of 2027 and 2047 on June 23.According to bond paperwork, neither has a condition allowing Russia to pay in rubles, but they do allow for different currencies like euros, pounds, and Swiss francs. The Finance Ministry must provide bondholders at least five days' notice if it plans to transfer to one of these currencies.
However, these payments must begin their trip to bondholders through Russia's sanctioned National Settlement Depository as paying agent, much like the coupons that are stopped. The funds would typically leave the NSD for international depository institutions like Euroclear and then be transferred to custodian banks all around the world where individual bondholders' accounts are located.
On June 24, a $159 million payment is due on a note with a 2028 maturity date that has no redeemable securities but the dollar. Since the US allowed a Treasury carve-out permitting Americans to receive Russia's sovereign payments to expire on May 25, the likelihood of it passing is slim.
Additionally, the designation on that bond suggests that JPMorgan Chase & Co. would act as the paying agent and that payments would be made via financial infrastructure outside of Russia.
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