The "gas - ruble" mechanism is reversal
Finance Minister Anton Siluanov explained to Russia's Vedomosti business daily that a similar plan to the mechanism Russia uses to receive ruble gas payments will be used to repay sovereign debt. The bondholders will need to open two accounts at a designated Russian bank to receive those funds.
Russia has long used a Western-controlled financial system for bond interest payments, but access to these systems has been restricted under sanctions imposed in retaliation for Russia's military campaign in Ukraine in February.
The US previously allowed payments to owners of Russian Euro bonds - the first use of frozen foreign exchange reserves and then foreign trade profits - but last week the US Treasury Department announced that it would not extend the exemption.
Speaking to vedomosti, Finance Minister Anton Siluanov said Russia plans to use a similar plan to the ruble gas payment mechanism for unfriendly countries to circumvent the US ban. The ministry previously said the debt would be paid in rubles.
The ruble gas payment plan - introduced to ensure that foreign currency payments are not misappropriated by Western countries - requires customers from "unfriendly" countries to open two accounts at a Russian bank. Payments were made in Euros and then converted to rubles.
The payment mechanism for Euro bonds will operate in a similar manner, but in the opposite way, Siluanov said, adding that the Ministry will soon complete the new mechanism and be ready to present it to bondholders. The minister said Russia would have a mechanism to pay for Euro bonds by the end of July.
US restrictions aimed at preventing Russia from paying interest on bonds could lead to a technical bankruptcy. However, US officials admit that it was just a symbolic blow to Russia.
If Russia goes bankrupt, I dont think it will significantly change the situation in Russia, because in fact Moscow has been excluded from global capital markets, said US Treasury Secretary quan Yellen. Yellen added that the US's failure to extend the exemption is "to allow a period of orderly transition and for investors to sell bonds".
Moscow, meanwhile, said Russia's failure to repay sovereign debts was due to US financial fraud and did not reflect Russia's real financial situation. Unlike the domestic bankruptcy in 1998, it will not affect Russia's domestic situation, the Finance Ministry explained.
Russia pays bond interest, avoids bankruptcy
Reuters reported that Russia paid due interest on two Euro bonds on May 27. Russia's National Payment Depository Service (NSD) said that these two Euro bonds mature in 2026 and 2036. Russia has transferred two payments to the depositors in an effort to avoid a technical bankruptcy.
The payment came just days after the US decided not to extend the exemption allowing Russia to repay the debt in foreign currency. The exemption was made early this spring, after the US and several other Western countries imposed sanctions on Russia. The US not extending the exemption means that creditors may not be able to receive payments even if Russia makes them, which will create bankruptcy.
However, analysts say this type of bankruptcy is unprecedented because Russia is under geopolitical pressure, not due to inability to pay. Russia has repeatedly claimed to have money to pay bond interest on oil and gas revenue and $300 billion in reserves (in addition to another $300 billion frozen by sanctions). However, Western sanctions have essentially prevented Russia from conducting foreign currency transactions and Moscow has no way to pay without a US exemption.
Finance Minister Anton Siluanov said that Russia considers this situation an "artificial bankruptcy" and is studying a new mechanism (as mentioned above) to pay bond interest without US exemption. The next Euro bonds maturing in 2027, 2028 and 2048 will be paid at the end of June.
Minister Siluanov reiterated that Russia will pay the interest on Euro bonds in rubles if it cannot pay in foreign currency, to protect its image as a reliable borrower.
According to RBC, Russia could use the "replacement currency payment" clause stipulated in Russian securities documents. Under this clause, payment obligations are considered fulfilled if the payable amount is then converted into USD from the currency used for payment. Experts say the provision is enough for Russia to deal with bankruptcy if that happens. However, Moscow hopes to avoid bankruptcy, even a technical bankruptcy, as that would reduce future Russia's borrowing opportunities and increase borrowing costs.
