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Russia’s minister of finance has proposed a new payment mechanism that he believes will allow the country to skirt US sanctions on sovereign debt coupons.
As quoted by Russian business news outlet Vedomosti, finance minister Anton Siluanov suggested that investors could open two accounts with a Russian bank to receive sovereign debt repayments.
One account would be denominated in a foreign currency, the other in roubles. Russia would then service its obligations in roubles, which could then be converted to the foreign currency of choice.
Siluanov said the payment method would be a mirror-image of the way that Russia is currently handling payments for gas purchases from European companies, whereby euros or dollars are deposited in a Russian bank account and then converted to roubles.
As VIXIO reported last week, the European Commission has unexpectedly changed its tune as to the legality of Russia’s gas payments workaround, which was first proposed by President Putin in a March 31 decree.
This month, the commission’s acquiescence to Putin’s demands led numerous European energy companies, including Italy’s Eni, to publicly announce that they will be buying Russian gas using the rouble conversion scheme.
No more waiver
Siluanov’s latest proposal comes in response to the US Treasury’s closing of a loophole that had allowed the Russian government to pay US bondholders through US Banks.
In a statement published on May 25, the Treasury said that the provisions that authorised certain debt and equity related transactions as parts of its prior issued Russian Harmful Foreign Activities Sanctions Regulations would not be renewed beyond its May 26 deadline.
Technically, the removal of the waiver means that Russia is now set to default on sovereign bonds held by US investors. However, the Kremlin has said that it will not accept default status.
Speaking at Moscow’s Financial University last week, Siluanov said that Russia has the money and the willingness to pay, but is being artificially pushed towards default by an “unfriendly nation” in the West.
“We are a country that cooperates with investors, and we are a reliable borrower,” he said, as quoted by Russian state-owned news outlet RIA.
“Even in these conditions, when restrictions on the payment of our debt are announced, we will ensure that the appropriate coupon can be received from us.
"It is very important to us to maintain the reputation of our country as a reliable partner,” he added.
Despite Russia’s insistence that it be spared default, analysis from US credit ratings agency Moody’s has shown that default is now practically guaranteed.
According to Moody’s, Russia already came dangerously close to default last month, when it attempted to make payments to foreign bondholders in roubles.
Since the original bond contracts called for the payments to be made in US dollars, Moody’s wrote that, if not remedied within 30 days, this would be considered a default under Moody’s definition.
Ultimately, Russia transferred the funds in US dollars just days before the grace period ended. But with the window now closed for payments to US persons holding these bonds, default is now highly likely.
Elsewhere in its analysis, Moody’s wrote that although eurobonds issued after 2018 allow for repayments to be made in roubles under certain conditions, those issued before 2018 either do not contain this alternative currency clause, or only allow repayments to be made in designated currencies (such as the US dollar, euro, sterling or Swiss franc).
At present, Russia has about $40bn of international bonds outstanding, and is expected to make about $2bn in debt payments by the end of the year.
Russia was also due to pay $100m in dollar and euro coupons last Friday, and the passing of the deadline means that a 30-day grace period — or countdown to default — is now underway.
Rouble strength a double-edged sword
Siluanov’s comments open up a new phase in the currency war that Russia has been fighting in parallel with its military operation in Ukraine.
After Russia launched its invasion on February 24, the rouble quickly lost about 50 percent of its value against the US dollar.
This prompted President Putin, on February 28, to sign an executive order aimed at safeguarding the value of the rouble.
The order stipulated that Russian residents whose business generates foreign currency must immediately sell 80 percent of all such foreign currency into roubles.
It also forbade foreign citizens from transferring currency or assets held within Russia overseas.
This was followed, on March 1, by a second executive order that prohibited any person from transferring $10,000 or more in assets or foreign currency overseas.
But with the rouble having since rebounded to its highest level against the US dollar in over two years — and currently up 23 percent year-to-date — Russia is now taking steps to take the heat out of its newly strengthened currency.
On May 24, President Putin signed an amendment to his decree of February 28, reducing mandatory foreign exchange sales for Russian residents from 80 percent to 50 percent.
Two days later, the Bank of Russia also cut its benchmark rate from 14 to 11 percent, its third rate cut in just over a month. The Ministry of Finance noted that rouble stabilisation was a key goal of both moves.
