Russia taps FX reserves to dodge bond default

Russia taps FX reserves to dodge bond default
Russia narrowly avoided a damaging default by digging into its hard currency reserves to pay over $600mn to meet bond obligations only days before a grace period to make the payment expired. / wiki
By bne IntelliNews May 3, 2022

The Russian finance ministry said it has paid $564.8mn and $84.4mn in foreign currency for 2022 and 2042 Eurobonds to the paying agent of the London branch of Citibank. The ministry tapped into its foreign currency reserves through non-sanctioned mortgage banks to make the default-dodging payment, Bloomberg said, citing unnamed sources.

“Payments were made in the currency of the respective Eurobond issues US dollars. Thus the sovereign Eurobond servicing obligations are fulfilled in compliance with the conditions set forth in the issue documentation,” the Finance Ministry stressed after previously having tried to pay in rubles.

Reportedly, the Office of Foreign Asset Control (OFAC) of the US Treasury is allowing the funds to be transferred, unnamed Treasury officials told Bloomberg.

Previously the OFAC had closed the loophole allowing the Finance Ministry to use sanctioned Central Bank of Russia (CBR) reserves to make sovereign debt payments, stressing that Russia having to choose to use its available domestic reserves to service debt is a key aim of the US restrictions. 

As covered by bne IntelliNews, due to OFAC actions Russia was already on a 30-day countdown to May 4 sovereign default after the Finance Ministry said it was unable to process $649.2mn worth of coupon payments for its 2042 Eurobond in US dollars because the transaction had been declined by foreign banks.

The ministry doubled down on the sovereign default stand-off with the West and transferred the full payment in rubles instead to the domestic National Settlement Depository. The rating agencies considered the ruble payment as technical default. But it seems that the Finance Ministry has made a last-moment decision to make a foreign currerncy payment and postpone the default after all. 

Reportedly, Dom.RF made a transfer to Bank of New York Mellon, the correspondent bank on the bond, which has forwarded the payment on to Citigroup after getting proper assurances from regulators, according to Bloomberg sources. Citigroup will have to pass the payment on to clearing houses.

Analysts surveyed by RBC daily believe that it is extremely unlikely that OFAC has allowed Russia's Finance Ministry to tap into sanctioned CBR reserves and believe that the ministry used FX revenues from energy exports instead. 

A senior unnamed US official confirmed to Reuters that Moscow had made the payment without using reserves frozen in the US. Deputy US Treasury Secretary Wally Adeyemo told Reuters that the payments siphoned funds away from Russia's Ukraine war effort and were a "sign of success" for US sanctions policy.

In the meantime, analysts and traders reminded Reuters that the prospect of a default still loomed large if the US Treasury allows the Russian debt payment licence to expire on May 25, with Russia having another bond payment only two days after the deadline. If the May 25 waiver is not extended, it would be almost impossible to continue avoiding default.

"The real question is whether this is just delaying the inevitable," MSCI managing director Andy Sparks told Reuters. "Most investors will take that date of May 25 very seriously and many will not expect that exception to be extended."


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