Russia to pay dollar bonds in rubles after US blockade

Russia moved a step closer to a possible default on its foreign currency debt on Wednesday after the country’s finance ministry said it was forced to make payments to holders of its dollar-denominated bonds in rubles.

The decision to pay in Russian currency comes after the US Treasury Department blocked US banks from processing dollar payments from Russia and halted $649 million in interest and principal due Monday. JPMorgan, the so-called correspondent bank responsible for settling the transaction, declined to process the money after seeking advice from US authorities, according to a person familiar with the matter.

“Due to the unkind actions of the US Treasury Department . . . The Russian Treasury Ministry was forced to hire a Russian financial institution to make the necessary payments,” the ministry said in a statement on Wednesday. Payments will instead be made to ruble-denominated accounts in Russia, and proceeds can be converted to dollars after the “Russian Federation’s access to foreign currency accounts is restored,” she added.

The move reiterates an earlier threat by Russia to make debt payments in rubles if Western sanctions prevent it from getting dollars to bondholders. Foreign investors widely view such a move as a default, which would be Moscow’s first since the 1998 Russian debt crisis. Rating agency Fitch said last month an attempt to make dollar interest payments in Russian currency would indicate “that a default or default-like process has begun.”

However, Kremlin spokesman Dmitry Peskov reiterated on Wednesday that the freeze on its foreign exchange reserves after Russian President Vladimir Putin invaded Ukraine in February was an attempt to force it into an “artificial default”.

“Russia has all the necessary resources to service its debt,” Peskov said in a conference call with journalists.

“As you know, significant amounts of our reserves are frozen abroad. So if they continue to be blocked in this way, and then transfers from the frozen amounts are also blocked, they will be served in rubles,” said Peskov.

“In other words, there is no basis for a real default. There are none, not even close.”

Some of Russia’s foreign currency bonds have terms in fine print that allow payment in rubles when they cannot be made in dollars or euros, but the dollar bond due Monday and a bond due in 2042 that was due to pay a coupon on Monday are not among them .

A holder of Russian dollar bonds said he didn’t think it would be possible to open the “Type C” account in a Russian bank needed to receive the ruble payments without violating sanctions.

“If bondholders don’t get their money, they will assume it’s a default,” said Cristian Maggio, head of emerging market portfolio strategy at TD Securities. “But the Russians argue that they are willing to pay. This is a very unusual situation and could ultimately lead to legal action in a number of different jurisdictions where investors hold the bonds.” Russia to pay dollar bonds in rubles after US blockade

Adam Bradshaw

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