Russia pays dollar-bonds in roubles as it seeks to avoid default

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Russia has been struggling to make payments on its $40 billion of international bonds since being hit with sweeping sanctions over its Feb. 24 invasion of Ukraine.

The latest payments amounting to 12.51 billion roubles ($234.5 million) were due on two Eurobonds maturing in 2027 and 2047 , whose terms do not allow for payments in Russia’s currency.

“Obligations on servicing the state securities of the Russian Federation were fulfilled by the finance ministry in full,” the ministry said in a statement.

Both dollar-denominated bonds have in their terms provisions that payments could be made under certain circumstances in euros, pounds sterling or Swiss francs. However, they do not foresee payments in roubles, the currency Moscow used in the latest transfer. Both issues also have a 30-day grace period on payments.

To avert default, funds broadly have to be paid in the correct currency into bondholders’ accounts within the prescribed timeframe.

The latest money transfers to the National Settlement Depository (NSD) come after President Vladimir Putin signed a decree on Wednesday to establish temporary procedures aimed at fulfilling Russia’s foreign debt obligations.

The ministry said it was transitioning to the procedure established by the decree, and funds will be disbursed in roubles to the NSD before reaching bondholders in stages, depending on the amount of sanctions.

While Eurobond holders whose ownership rights are contained within the country’s financial system will be paid in roubles, the holdings of investors to whom funds cannot be transferred due to sanctions imposed on Moscow will need to open a rouble account in the NSD to receive those funds.

It is unclear as yet whether foreign investors – many of whom will have to navigate sanctions imposed by their own governments – will be willing or even permitted to open such accounts.

But the wider process is beset with legal and commercial uncertainties, according to lawyers and analysts.

“It’s still unclear whether the paying agent of Russia bonds works for the government or the creditors,” said Mitu Gulati, a law professor at the University of Virginia and an expert on debt restructurings.

“The Russian lawyers put so many landmines in a contract, and it’s not even clear in which jurisdiction a creditor could potentially sue the country,” he said.

Russia has been on the brink of default since the U.S. Treasury decided in May against extending a key license that had allowed Moscow to keep paying bondholders despite the sanctions.

A 30-day grace period on interest payments worth $71.25 million and 26.5 million euros that were due May 27 expires on Monday. While Russia decided to send the money to the payment agent NSD before the U.S. Treasury’s decision, it is unclear whether the money made it further into bondholders’ accounts.

($1 = 53.3500 roubles)