Russia Uses Domestic Dollar Stash to Avoid Defaulting on Bonds

(Bloomberg) -- Russia appears to be on track to avoid a looming sovereign default after tapping its domestic dollar reserves to make payments on two foreign bonds that had previously been blocked by sanctions.

The U.S. is allowing the funds to be transferred, according to a Treasury official, speaking on condition of anonymity. The fact that Russia is using its domestic reserves has been a key aim of the U.S. restrictions. The idea is to force Russia to drain that pool and undermine its capacity to finance its invasion of Ukraine.

Earlier on Friday, Russia’s Finance Ministry said it sent dollars to the paying agent, Citibank N.A., London branch. The amounts were $564.8 million on a 2022 Eurobond and $84.4 million on a 2042 bond.

Russia used a non-sanctioned bank, Bank Dom.RF JSC, to make coupon payments on its Eurobond using its dollar reserves, according to a person familiar with the matter. Bank Dom.RF then passed along the funds to Bank of New York Mellon Corp., the correspondent bank on the bond, the person said, asking not to be identified discussing confidential information. After BNY Mellon got proper assurances from regulators, it forwarded the payment on to Citigroup Inc. on Friday. Citigroup is unlikely to process the payment until it has received sign-off from both U.S. and U.K. regulators, the person said.

Citigroup will pass the payment onto clearing houses, who will be charged with distributing the cash to investors’ accounts held with custody banks. Payment was yet to be received by at least one of the clearing houses as of the close of European business hours, according to a person familiar with the matter.

The country had previously tried to make the payment in rubles after the dollar transfers were stopped in early April by its correspondent bank. That breached the terms on the debt and set the clock ticking on a 30-day grace period, which ends May 4, after which a default could be declared.

Sanctions and Seizures

The payment is another twist in the economic and financial battle that’s been playing out since the war started. Western sanctions have frozen Russia’s foreign reserves and cut the country off from the global financial system, while the assets of politicians and businesses linked to Vladimir Putin have been seized by authorities.

If that money gets to investors before the end of the grace period, it could see the nation dodge what would have been its first default on foreign-currency debt since the Bolsheviks repudiated Czarist Russia’s debts more than a century ago.

The cost of insuring Russia’s sovereign debt dropped sharply on Friday. The contracts signal about a 75% chance of default, according to ICE Data Services, down from 99% earlier this week.

After the bond payments were blocked this month, Russia responded with threats of legal action, saying the U.S. and others are trying to force it into a default. It’s also used its energy resources as leverage, and this week cut off gas supplies to Bulgaria and Poland.

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With assistance from Bloomberg