Russia's bond payment is in limbo as default countdown kicks off

Russia’s Finance Ministry said that it has paid the interest on its dollar bonds to its correspondent bank, giving incremental details on a payment that has come to exemplify how Moscow plans to handle its future relations with creditors.

Russia’s Finance Ministry said that it has paid the interest on its dollar bonds to its correspondent bank, giving incremental details on a payment that has come to exemplify how Moscow plans to handle its future relations with creditors. 

In an emailed statement on Thursday, the finance ministry said it had sent the order for a US$117 million coupon payment on March 14 to a correspondent bank that it didn’t identify, adding that it would issue a separate comment if the paying agent, Citibank’s London branch, has received the payment. The bank didn’t immediately respond to requests for comment. 

So far, bondholders in Europe have received no sign of the funds. Both bonds with coupons due Wednesday rose.

What happens next is unclear, but if Russia’s creditors don’t get the cash in dollars within the 30-day grace period that starts on Thursday, it would be the first time the nation defaulted on foreign-currency bonds since the Bolsheviks repudiated the czar’s debts in 1918. Kremlin spokesman Dmitry Peskov said the nation has all the resources it needs to avoid a default.

If, however, it doesn’t meet its debt obligations, the outcome could reinforce Russia’s exclusion from global capital markets and raise its borrowing costs. The government and firms including Gazprom and Lukoil have about US$150 billion of foreign-currency debt. Such amounts and the broader financial squeeze may not be enough to threaten a global financial crisis, but the strains are rippling through emerging markets and could deal shocks to a world economy undergoing a seismic transformation in the wake of the invasion of Ukraine.

“The Russian debt deterioration was very sudden and in a country where the fundamentals were strong, so it will definitely be more significant than, say, Argentina’s default,” Anthony Kettle, a senior portfolio manager at BlueBay Asset Management Plc, said. “It may lead to some further diversification of international reserves, with possibly more of a role for CNY, as the U.S. has used sanctions and the dollar reserve asset status so effectively in this case.”