By Karin Strohecker, Sujata Rao and Marc Jones
(Reuters) – Some creditors have received payment, in dollars, for coupons on Russian bonds that matured this week, two market sources said on Thursday, meaning Russia may have avoided this for now. which would have been its first external bond default in a century.
Russia’s Finance Ministry said earlier it had sent funds to cover $117 million in coupon payments on two dollar-denominated sovereign bonds.
The payments, due March 16 but with a 30-day grace period, are seen as the first test of whether Moscow will honor its international debt obligations after Western sanctions hampered its financial dealings.
“The coupon was paid, against my expectations, and in dollars,” one person said. Another person said the money was received by a customer who was in a bond.
Some other creditors said they had yet to receive their funds but were optimistic they were on the way, noting they had received payments on hard currency bonds from a range of companies public and private Russians in recent days.
Earlier, another source told Reuters that JPMorgan, Russia’s correspondent bank, processed the money sent by the government and credited it to the paying agent, Citigroup. It would be checked and then distributed to various bondholders, the source said.
Citi declined to comment.
External sovereign bond payments were the first to fall due since sanctions imposed following Russia’s invasion of Ukraine and Moscow’s tit-for-tat measures, and bondholders feared that the transaction is frustrated.
Russia had planned to send the equivalent amount of the interest payment in rubles if the dollar payments did not reach foreign bondholders, which credit rating agency Fitch said would constitute a sovereign default s was not corrected within a 30-day grace period.
S&P on Thursday downgraded Russia’s rating to “CC” from “CCC-minus”, saying debt service payments in the coming weeks could face technical difficulties.
Washington imposed severe sanctions on the Russian central bank in late February, days after the invasion of Ukraine, preventing Americans from engaging in any transactions involving it.
In early March, however, the U.S. Office of Foreign Assets Control (OFAC) cleared transactions for U.S. persons for “the receipt of interest, dividends, or payments when due in connection with debt or shares” issued by Russia’s finance ministry, central bank or wealth fund – an exemption that expires on May 25.
Russia has also established tough new rules for foreigners seeking permits to buy and sell Russian assets ranging from securities to real estate, a Citigroup client note showed, raising further concerns about the fact that Western investors could face significant write-downs.
TRACKING UPCOMING PAYMENTS
The March 16 coupons are the first of several, with an additional $615 million maturing during the rest of the month. The first principal payment is due on April 4 when a $2 billion bond matures.
“Even if this week’s payment is made, investors will then need to monitor future upcoming payments as they may be treated differently,” said Jonny Goulden, head of local emerging markets and sovereign debt strategy at JPMorgan. , in a footnote.
He noted that the upcoming payments are either cleared through the Russian NSD settlement mechanism or because they have the option to make the ruble payment embedded in the bond contract.
After the May 25 sanctions deadline and through the end of the year, Russia is expected to pay nearly $2 billion more on its external sovereign obligations.
The bonds themselves were issued with a mixture of terms and deeds. Bonds sold after Russia was sanctioned for its 2014 annexation of Crimea contain a provision for payments in alternative currencies. For bonds listed after 2018, the ruble is listed as an alternative currency option.
According to data from Refinitiv, Russian bonds are hovering at deeply distressed levels in highly illiquid trading, with most issues trading less than a handful of times per day.
The premium demanded by investors to hold Russian hard-currency bonds over US Treasuries, as calculated by the JPMorgan EMBI Global Diversified Index, nevertheless tightened to 3,737 basis points on Thursday – the lowest level lowest since early March.
This premium had been just over 200 basis points until mid-February, when a Russian default seemed unthinkable.
Russian companies are also being watched for their ability and willingness to pay. They have nearly $100 billion of hard-currency bonds outstanding, about a fifth of which are held by international investors.
The country’s second largest state lender, VTB, also the target of Western sanctions, said on Thursday it would hand over the management of foreign securities to other Russian financial firms, state news agency TASS reported.
(Additional reporting by Megan Davies in New York; Writing by Karin Strohecker; Editing by Catherine Evans, Alistair Bell and Leslie Adler)