Russia’s Finance Ministry on April 6 said it was unable to process $649.2mn worth of coupon payments for its 2042 Eurobond in US dollars as the transaction was declined by foreign banks. The ministry said it transferred the full payment in rubles instead to the domestic National Settlement Depository and “considers its obligations fulfilled in full”.

Payment in a currency other than US dollars would mean that Russia is now on a countdown to sovereign default until the end of the 30-day grace period that will expire on May 4.

The unprecedented announcement that the ministry is to repay the country's international debt obligations in rubles has come next day after the US Treasury Department closed a sanction loophole, forcing Russia to choose between using its remaining forex reserves for stabilising the domestic economy and formal default.

On April 4, Russia’s payment of $552mn principal on a maturing bond was due, with the Finance Ministry previously buying out about $1.5bn of the issue in rubles. Another $84mn coupon payment on the 2042 bond was due on April 4. A 30-day grace period remains for the payments. Overall, Russia has 15 outstanding Eurobonds with a face value of $40bn.

As followed by bne IntelliNews, Russia has so far managed to avoid sovereign default despite the warnings from the credit rating agencies and threats to pay coupons in rubles instead of foreign currency, all the while the forex/gold reserves remain sanctioned. 

Previously the Finance Ministry had already paid coupons in foreign currency on sovereign debt on March 17, March 23 and March 29. However, the payments had to be executed under an exceptional licence of the US Treasury Department that allows investors to receive debt payments on Russian sovereign Eurobonds until the deadline of May 25, 2022.  

On April 5 the Treasury closed the loophole, forcing "Russia [to] choose between draining remaining valuable dollar reserves or new revenue coming in, or default." Reportedly, the $600mn coupon payment in question was blocked by the Treasury in JP Morgan.

The Finance Ministry thus opted for confrontation. Since the beginning of the invasion of Ukraine the Central Bank of Russia (CBR) has already spent $25bn on stabilising the ruble. This is almost 10% of the roughly $300bn in reserves that remain unsanctioned out of $604bn total. Last week the Treasury also confirmed that Russia’s $136bn worth of gold reserves are subject to secondary sanctions as the West tries to close down loopholes in its extreme sanction regime.

This week Tim Ash of BlueBay Asset Management argued that sovereign default for Russia matters, “because it will likely lock Russia out of international capital markets for years (decades) to come, and will complicate and increase the financing costs even where Russia seeks to secure financing from friendly nations such as China.” This would also greatly impede FDI.

He argues that Russia will not be able to turn around as fast as it did after the 1998 default, as this time it “will remain an international pariah, as long as it remains in Ukraine” and will not get the support of the international institutions and investors.