Interest payments on Russian bonds flow through the Western financial system

Russia moved closer to avoiding its first default since 1998 as payments on two of its dollar bonds flowed through the Western financial system before reaching investors.

The country’s foreign-currency government bonds have rallied as evidence emerges that $117 million in coupon payments, which were due this week, are working their way up the chain that separates the Russian government from investors .

Euroclear and Clearstream, the major international securities depositories, received and processed two coupons from payment agent Citigroup, according to people familiar with the matter. The duo, who declined to comment, settle transactions on behalf of investors and transfer money between bank accounts. The funds will then be transmitted to custodian banks before finally reaching investors. An investor told the Financial Times that he received the funds in his bank account.

JPMorgan previously processed payments that were due on two bonds on Wednesday, passing the money to Citi, according to a person familiar with the matter. JPMorgan made the decision to process the payment after consulting with US authorities, the person added. Citi and JPMorgan both declined to comment.

The two bonds, which mature in 2023 and 2043, traded at around 50 cents to the dollar on Friday – down from around 20 cents a week ago – the remaining $38.5 billion in foreign currency debt of Russia reaching similar levels. As bonds continue to trade at distressed levels, investors repriced a market that was priced for 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 called defaulters. The question is how long they will be allowed to continue.

Russia’s Finance Ministry said on Friday that Citi had received the necessary funds to make the coupon payments. “Thus, the ministry has honored its obligations to service public securities in full in accordance with the issuance documentation of Eurobond issues,” he said, according to Russian news agency Interfax.

Russia has a 30-day grace period from the March 16 due date to make the payment and avoid defaults. US sanctions prevent investors from trading Russian bonds issued after March 1, but they are still allowed to trade those that were sold before that date.

Despite apparent progress towards paying coupons on Wednesday, ratings agency S&P Global downgraded Russia’s credit rating to double C on Thursday evening, citing “reported difficulties in meeting debt service payments at the due date”.

“We believe that debt service payments on Russian Eurobonds due in the coming weeks may encounter similar technical difficulties,” S&P said, adding that a US sanctions waiver that allows US investors to receive the Russia’s interest payments expire on May 25, further complicating debt servicing after that date.

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

Monday’s coupon is for a bond whose terms contain a “fallback” clause allowing redemption in rubles if Russia is unable to pay in dollars. Russian Finance Minister Anton Siluanov said earlier in the week that it would be “absolutely fair” to make repayments in rubles until Western sanctions freezing Russia’s central bank assets are lifted, raising fears that Moscow is trying to make Wednesday’s payments to Russia. currency.

The governor of Russia’s Central Bank said on Friday that trading in local-currency government debt – which was suspended since shortly after the invasion of Ukraine – would resume on Monday. Elvira Nabiullina also said that the Bank of Russia will make purchases of ruble-denominated government bonds “to avoid excessive volatility and ensure a balanced liquidity position in this segment at the reopening stage.”

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Don F. Davis