Russia Slams Default Threat as ‘Farce,’ Pays Interest in Rubles

(Bloomberg) — Russia said international sanctions have created a “force-majeure” situation that’s forced it to switch to servicing its eurobonds in rubles in a bid to avoid a default.

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Finance Minister Anton Siluanov likened the government’s predicament to a “farce,” in which it has the money and the intention of paying, but its hard currency can’t pass through the international settlement system due to sanctions over the invasion of Ukraine.

“Overseas counter-agents have refused to make payments in foreign currencies, which for us is a force-majeure situation,” Siluanov said in an emailed statement. “And it’s purely for this reason that we are switching to payments in rubles.”

Earlier on Thursday, the Finance Ministry said it transfered the equivalent of $235 million in interest on notes maturing in 2027 and 2047 to Russia’s National Settlement Depository. It’s due to pay a further $159 million Friday on a note maturing in 2028.

But more pressing is a Sunday-night deadline on previous missed payments from late May. Once that grace period is up, Russia will effectively be in its first foreign default since the Bolshevik revolution more than a century ago.

Under new regulations approved Wednesday by President Vladimir Putin, Russia considers its debt obligations on foreign bonds fulfilled once it has transfered rubles to its local paying agent, in this case the NSD. However, neither of the bonds have terms that allow for settlement in that currency.

The funds will be held on special ‘I’ accounts at the depository until investors have proved their title to the bonds, after which they can request permission to convert and repatriate the funds, according to the ministry. Investors who opt to use the new route must submit their consent in writing and waive any future objections to the process, the ministry said.

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It’s unclear if the latest maneuver, which is aimed at reducing the risk of sanctions by avoiding overseas settlement systems, will be used by foreign investors and whether the restrictions will even allow them to ultimately move their funds out of Russia.

$100 Million Stuck

Meanwhile, about $100 million of bond coupons that were due in May are stuck, and the grace period to find a solution expires at the end of the day on June 26.

While Russia may be labeled by some as having defaulted, this won’t be correct, because its ability to pay was curtailed by third parties, Siluanov said.

Furthermore, it transfered the funds at the appropriate exchange rate on the day of payment, and foreign investors are able to access the funds, convert and repatriate them under the new rules, Siluanov said.

Read more on the legal side of the story: Russia’s Default Tussle With Bondholders Is Only Just Starting

It makes little sense for creditors to seek a declaration of default through the courts because Russia hasn’t waived its sovereign immunity, and no foreign court would have jurisdiction in the case, Siluanov said.

And even if a court decision against Russia was — hypothetically — handed down, “the investor would in any case come to us and receive what we’ve already set aside for him,” he added.

(Updates with Siluanov comments throughout)

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