Here’s How Russia Can Avoid Default After US Pulls Plug on Dollar Debt Payment Exemption

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On Tuesday, the US Treasury announced that its Office of Foreign Assets Control would not renew a key sanctions waiver allowing Russia to make payments to US banks and individuals invested in Russian state-issued bonds in dollars. Economists indicated that the measure was designed to force Moscow into defaulting on its externally held debt.
Moscow could avoid defaulting on its obligations to foreign creditors by simply making the payments in rubles, RBC, a Russian business newspaper, has reported.
The outlet pointed out that although international credit rating agencies have warned that the redenomination of payments by changing the payment currency would be deemed a default, this does not apply to Eurobonds issued by the Russian Finance Ministry since 2018, which has the built-in option of ruble payments if dollar payments were somehow made impossible.

Furthermore, all Russian government bonds, including older issuances, feature a ‘Currency Indemnity’ clause, which similarly opens the door for ruble payments to be made. Under the clause, obligations will be considered fulfilled if the investor can exchange payment received in rubles into dollars in the amount due “on the first date on which it is practicable to do so,” with the Russian Federation obliged to compensate any losses during conversion, as well as all transaction costs.

Russia has over $30 billion worth of dollar-denominated sovereign bonds on the market. The country also has over $300 billion in reserve assets frozen in Western banks which the US and its allies have threatened to seize and spend in Ukraine, and an equal or greater amount in coffers at home or in friendly countries.
RBC notes that while the ‘Currency Indemnity’ clause makes reference to judicial decisions in Russian courts, “in principle it is broad enough for Russia to prove the absence of a default if foreign holders of debt have the ability to exchange the received rubles for dollars.”
After the US Treasury’s announcement Tuesday that it would “not renew the provisions of” a sanctions exemption allowing Russia to make payments on its Eurobond debts using the greenback, the Russian Ministry of Finance issued a press statement indicating that ruble payments for non-residents could be converted into dollars through the National Settlement Depository, a Russian non-bank financial body providing depository, settlement and related services to financial market entities.
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American investors would still require a US license to conduct transactions with the Russian Finance Ministry, essentially meaning that they will not be able to do anything with the rubles they receive. However, non-US investors could settle with Russia through the NSD, according to RBC.
Maximilian Hess, head of political risk and Russia specialist at Hawthorn Advisors, a London-based consultancy, said the International Swaps and Derivatives Association or international credit rating agencies could still declare Russia to have defaulted on its debts if ruble payments are made to non-residents, citing “problems with the convertibility” of the Russian currency.
The United States government has been accused of influencing US-based credit rating agencies in the past, such as the Greek debt crisis, which led to the debasing of the value of the euro and spread financial contagion across the European Union for years to come.
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The next scheduled payment on Russian Eurobonds is 23 June, with the payout to be made in dollars, euros, pounds sterling or Swiss francs, and then on 24 June (in dollars). The latter includes a 15-day grace period. A default can be declared if 25 percent or more of its holders agree to do so. It remains unclear just how much of Russian sovereign debt is held by US residents.
If Russia goes ahead with making ruble payments on its debt, the bond crunch will be the second time the national currency has been used to get Moscow out of a financial pinch. In late March, President Putin signed a decree requiring that Russian natural gas sold to countries which have sanctioned Moscow be paid for in rubles. The measure quickly reversed the tanking of the ruble against the dollar and the euro, with the Russian currency climbing out of a low of nearly 140 rubles per dollar in early March to 66 rubles per dollar on Friday.
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