Russian President Vladimir Putin speaks during a meeting with business representatives at the Kremlin in Moscow, Russia February 24, 2022.

Alexei Nikolskyi | Sputnik | via Reuters

Russia appears to have evaded a historic default as it claims to have made key interest payments on two dollar-denominated Eurobonds.

Russia’s finance ministry said Friday that the London branch of paying agent Citibank had received total payments of $117 million. The US bank is responsible for processing payments on behalf of bondholders.

It was unclear whether Russia would have been able to meet its foreign debt obligations following a barrage of economic sanctions following its invasion of Ukraine.

The measures imposed by the US and international allies have blocked much of Russia’s gold and foreign exchange reserves and have sought to cut off Moscow from the global financial system.

The Kremlin had until the end of the business day to pay $117 million in interest on two sovereign Eurobonds. Failure to make good on these payments could have paved the way for Russia’s first foreign exchange default in over a century.

Holders of two Russian dollar bonds said coupon payments arrived Thursday, a day later than expected, The Wall Street Journal reported, citing investors and traders, but that the funds were well within the 30-day grace period under the terms of the bonds were received.

Kremlin spokesman Dmitry Peskov said on Thursday any default would have been “purely artificial” because Russia had the resources needed to meet its foreign debt obligations.

While Russia appears to have fully met its coupon payment obligations on this occasion, Moscow’s willingness and ability to repay its international debt will likely be put to the test again.

That’s because an exemption currently granted under US sanctions expires at the end of May, likely further complicating Russia’s ability to pay off foreign debt.

How did the payments go?

Economists were unsure how the Russian Ministry of Finance would handle payments in the face of targeted measures by the Central Bank of Russia that made much of its foreign exchange reserves inaccessible, leading to a slew of credit cuts by the major global rating agencies.

JPMorgan Chase, the largest US bank by assets, had been asked by the Russian central bank to process the $117 million coupon payments on its government bonds. After consultation with the US Treasury Department, the payment was transferred to paying agent Citi in London.

A spokesman for the US Treasury Department declined to comment when CNBC contacted him Friday morning.

JP Morgan Chase and Citi also declined to comment.

As a paying agent for Russian foreign bondholders, Citi was responsible for the administrative role of receiving and processing payments to a security holder on behalf of the issuer. Disclosure of confidential and financial information is generally prohibited.

Tim Ash, senior sovereign strategist for emerging markets at BlueBay Asset Management, described the payment as a “ridiculous move” by the US Treasury Department’s Office of Foreign Assets Control.

The OFAC administers and enforces economic sanctions based on US foreign policy objectives.

“OFAC is bailing out Western bondholders who should have known better, whose actions went against Western security interests, and cashed in on a potential Ukraine recovery fund,” Ash said via email on Friday, noting that the Russians were the “biggest beneficiary” . of this bond payment.

The US Treasury Department has previously said sanctions against Russia will not stop the country from paying off its international debts, at least until May 25.

‘High vulnerability’ to debt default

Credit rating agency S&P on Thursday downgraded Russia’s foreign and local currency credit rating from CCC to CC, citing the Kremlin’s “high vulnerability” to debt default.

“While public statements from the Russian Ministry of Finance suggest that the government is currently still trying to transfer payment to bondholders, we believe that the debt repayments on Russian Eurobonds due in the coming weeks, with similar technicalities problems can be faced,” said S&P. said Thursday.

The St. Basil Cathedral and a tower of the Kremlin are visible on Red Square in Moscow.

Sopa images | Light rocket | Getty Images

S&P said it could downgrade Russia’s credit rating to foreign issuers even further to SD if Moscow defaults on its external debt obligations in the coming weeks.

The scheduled expiration of the OFAC payments license on May 25 could negatively impact Russia’s ability to meet its debt obligations after that date, it added.

This post Russia appears to have averted its historic bond default – for now

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