Russia paid out $117.2 million on Eurobonds—what does this mean

Author

Valery Moiseev

The Ministry of Finance of the RF reported that on March 16 it had executed a payment order for payments in the currency of coupon income on two issues of Russian Eurobonds.

The Ministry of Finance of the Russian Federation announced that it had executed a payment order sent on March 14 for payments in the currency of coupon income for $117.2 million on two issues of Russian Eurobond. According to the Fitch agency, if this had not happened, de facto the default process of the Russian Federation would have been launched.

Earlier, Russian Finance Minister Anton Siluanov said that Russia would try to pay off its obligations in dollars and that it has enough currency in foreign bank accounts for this. If they do not make the payment, then the payment will be made in rubles.

Problems with servicing the Russian government debt in foreign currency arose due to the fact that Western countries froze the gold and foreign exchange reserves of the Russian Federation after the outbreak of the war in Ukraine. About half of all reserves, $300 billion, fell under the restrictions.

In response, Moscow warned that they would pay the debts to "unfriendly countries" in rubles at the rate of the Central Bank of the Russian Federation. Fitch stated that Russia's payments in rubles would be considered a technical default. If within 30 days the Russian Federation does not convert these rubles into foreign currency, then the rating agencies will declare Russia's default on debt obligations.

American Citibank paid a coupon in foreign currency on March 16. This happened due to the fact that the US Treasury partially unblocked the accounts of the Russian Federation, allowing paying to investors in Russia's sovereign Eurobonds from them until May 25.

What Russia's default delay means

The accomplished payment of the coupon on Eurobonds in foreign currency means that:

investors in the West (mainly in the USA) gained the profit promised to them earlier;
gold and foreign exchange reserves of the Russian Federation decreased by $117.2 million;
Russia's credit rating has not yet been downgraded to default. Hypothetically, this allows Russia to obtain loans on international markets. But now, amid massive sanctions, no one will give it money there, regardless of its credit rating.

The head of one of the Russian investment companies, Alexei Tretyakov, believes that the default on Russian Eurobonds is unlikely to aggravate the situation amid a complete break in relations with the West and the freezing of gold and foreign exchange reserves of the Central Bank. But as long as Russia pays its debts, not only local investors will stay, but also non-residents who kept Russia in their portfolios both in 2008 and 2014. These are Asian funds and both former and current citizens of the Russian Federation investing through European private banks.

Recall that the head of the IMF, Kristalina Gergieva, said on March 13 that Russia could default on its debts, but this would not cause a global financial crisis. The total risk of banks working with Russia is about $120 billion. This amount is not negligible, but it "has no systemic significance."

It should be noted that the cost of Russian sovereign Eurobonds rose on March 16 by 10-13 percentage points, up to 36-40% of par. This happened amid reports of Ukrainian-Russian negotiations and promises to pay a coupon in foreign currency. Experts expected that if the coupon payment in foreign currency is made, then the quotes can grow up to 50% of par.