The Russian government has prevented an impending bankruptcy for the time being. Russia’s finance minister Anton Siluanov said on Thursday, according to Russian state media, interest was due on Russian government bonds in the amount of 117 million dollars. Because of Western sanctions freezing Russia’s foreign exchange reserves held abroad, it was initially unclear whether the payment would go through. The US Treasury Department in Washington then declared that it would allow the transactions despite the sanctions. The Reuters news agency reported that some owners of shares in the affected Russian dollar bonds had received the interest payments due.
The payments were seen as a first test of whether the government in Moscow can meet its international debt obligations. They would have been due on Wednesday, with a grace period of 30 days. The Kremlin had previously stated that if in doubt it would make payments in foreign currencies in rubles in countries that had been declared “unfriendly”. According to a new law, those western states that participate in the financial sanctions against Russia, including the USA and the EU states, are considered “unfriendly”. If the dollar payments are not allowed, the government has no choice but to pay its debts in rubles, Moscow said. That in turn would have meant an immediate default under the rules of the bonds in question.
With a debt ratio of only around 20 percent of pre-war economic output, Russia is considered one of the least indebted countries in the world. Because of its commodity exports, the country has a large current account surplus. The government debt held abroad is only four percent of gross domestic product – which would be almost irrelevant given Russia’s foreign exchange reserves. Nevertheless, the country is threatened with bankruptcy because of the sanctions: the measures taken by the West make it difficult if not impossible to service dollar or euro bonds. Although Russia also issued government bonds after the Crimean invasion in 2014, which can be settled in rubles, this does not apply to most foreign debts.
Moscow should be able to settle payments on dollar debts to Americans by May 25th
A spokesman for the US Treasury Department said on Thursday that the current payments would be allowed to go through. While US sanctions actually ban business with Russia’s central bank and most Russian financial institutions, Moscow will be able to make payments to Americans on dollar debt until just after midnight on May 25, the news agency quoted as saying Bloomberg a spokesman for the Treasury Department. The paying agent for the interest is the London branch of the major US bank Citigroup.
The three major rating agencies had previously downgraded Russian government bonds to just above junk level. Most recently, Standard & Poor’s lowered Russia’s credit rating by another notch. For the time being, the – partial – default by Russia has now been averted. It would only be official if at least some investors had not received any interest payments after the 30-day grace period in mid-April. It would be the first time since the 1917 Russian Revolution that the country would default on its commitments. At that time, the Bolsheviks had not recognized the debts of the Tsarist era.