Russian bonds rebound on signs Moscow will avoid its first default since 1998

Russian bonds continued their recent rally on Friday as investors bet Moscow had made interest payments on its dollar debt this week, averting the country’s first sovereign default since 1998.

The gains came after that JPMorgan processed the $117 million in coupon payments due on two bonds Wednesday and passed the money to payment agent Citigroup for distribution to investors, according to a person familiar with the situation. JPMorgan made the decision to process the payment after consulting with US authorities, the person added.

The two bonds maturing in 2023 and 2043 traded at about 50 cents on the dollar on Friday — up from about 20 cents a week ago — while the rest of Russia’s $38.5 billion foreign currency debt is at a similar level level climbed. As bonds continue to trade at distressed levels, investors have reassessed a market that was priced in for an immediate default.

“The Russian government has shown a very strong willingness to pay,” said Marcelo Assalin, head of emerging market debt at William Blair. “They clearly didn’t want to be labeled as a refusal to pay. The question is how long they can continue.”

Russia’s Treasury Ministry said on Friday that Citi had received the funds for the coupon payments. “The ministry has thus fulfilled its obligation to fully service government bonds in accordance with the issuance documentation for Eurobond issues,” the Russian news agency Interfax said.

Citi and JPMorgan declined to comment.

Monthly coupons and maturities for Russian government bonds in foreign currency

A European investor said on Friday morning that he has not yet received the interest payment but is expecting it. Russia has a 30-day grace period starting Wednesday to make the payment and avoid a default. US sanctions restrict trading in Russian bonds issued after March 1, but they are still allowed to trade in bonds sold before that date.

Despite apparent progress in coupon payments on Wednesday, rating agency S&P Global downgraded Russia’s credit rating to double-C late Thursday, citing “reported difficulties in meeting debt service payments by the due date.”

“We believe that debt service payments on Russia’s eurobonds maturing in the next few weeks could face similar technical difficulties,” S&P said, adding that a waiver to US sanctions that allows US investors to withdraw interest payments from Russia to obtain expires on May 25, further complicating the situation debt service after that date.

Russia owes an additional $615 million in interest payments this month, including $66 million on Monday, and faces a $2 billion bond call on April 4.

Monday’s coupon relates to a bond whose terms include a “fallback” clause that allows repayment in rubles if Russia is unable to pay in dollars. Russia’s Finance Minister Anton Siluanov said earlier in the week that it would be “perfectly fair” to make repayments in rubles until Western sanctions freezing the assets of Russia’s central bank are lifted, raising concerns Moscow would try to stop payments on Wednesday in Russian to make currency. Russian bonds rebound on signs Moscow will avoid its first default since 1998

Adam Bradshaw

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