Foreign holders of Russia’s sovereign bond maturing in 2029 are watching as the latest debt payment from the sanctioned nation draws closer to completion.
The $US66 million coupon due March 21 was processed Tuesday by Russia’s National Settlement Depository
(NSD), it said in a statement. Earlier in the day, the Finance Ministry said it had transferred the cash to the NSD, thus meeting its obligations “in full.” Four bondholders in Europe said they hadn’t received the payment as of 3.40 p.m. in London.
From this point, the cash would typically journey to custodian banks, which hold assets for safekeeping, then to bondholders’ accounts. But given the sweeping sanctions in place against Russia following President Vladimir Putin’s invasion of Ukraine, concerns will remain until the money actually lands in investors’ accounts.
“After a significant amount of speculation and consternation over a possible default, Russia has initiated coupon payments on two of its dollar bonds” emerging markets debt portfolio specialist with T. Rowe Price, Ben Robins, said this morning.
“This was a relief to markets, and the price of the bonds rallied on news of the payments. However, it should not be taken as a firm indication of what might happen to the rest of Russia’s foreign currency bonds, which total over approximately $US40 billion.”
He added a sovereign default was “an extremely rare event” and if Russia did default, it would be the first time since 1998.
Billions of dollars of Russian government and company debt have been put in question after as much as two thirds of the country’s foreign currency reserves were frozen, as well as the overseas assets of numerous billionaires.
Russia has at least $US400 million of interest payments coming due over the next 10 weeks, as well as a $US2 billion bond it must repay next month, data compiled by Bloomberg show. Last week, the government paid $US117 million in coupon payments.
“Using up their very finite foreign-currency reserves could be a good long-term investment — but that thinking clearly hasn’t been applied to the management of their reputation anywhere else,” said Gordon Shannon, a portfolio manager at TwentyFour Asset Management.
Unlike the terms of the bonds with coupon payments last week, the March 2029 prospectus has a rouble-fallback option, which allows Russia to make the transfer in its local currency. That’s raised questions about the ultimate denomination of the payment and prompted investors to track it from the start.
Russia sent the cash to JPMorgan Chase & Co., which processed the payment after getting approvals from the U.S. Treasury Department, according to a person familiar with the matter, confirming a Reuters report earlier.
Unlike the payment of the previous week, this bond’s prospectus states that the coupon settlement would be done through Russia’s central securities depository and Euroclear, one of the world’s biggest clearing houses. JPMorgan declined to comment earlier.
It’s not a process investors typically follow. The back-office moves took centre stage after sanctions and capital controls were imposed on Russia, and investors braced for a default. For now, the process is working, and not just for the sovereign.
Credit Bank of Moscow, a lender the Russian central bank has designated systemically important, said it fulfilled an obligation to make a $9.7 million coupon payment on its $500 million September 2026 bond. Two bondholders, who declined to be named as they aren’t authorised to speak publicly about the matter, said they had received payment.
Online lender Tinkoff Bank also paid its debt interest on time on its perpetual dollar-denominated notes. Multiple bondholders confirmed they had received a $6.94 million coupon due March 15, and a $9 million coupon due March 20.
Corporates and the sovereign have shown willingness to meet their financial obligations — a relief to investors who thought they wouldn’t see their cash after a presidential decree earlier in the month said some investors could be paid in roubles.
The government is “paying because they have significant western assets that creditors would lay a claim on if they go to bankruptcy,” said Phillip Torres, a senior portfolio manager of emerging market debt at Aegon Asset Management in Chicago.
“They are going to pay as long as they are able to. There is a real cost in going to bankruptcy that they would want to avoid.”