US Treasury Department officials said that Russia would no longer have the capacity to pay bondholders via US banks after May 25, 2022, as a result of the sanctions imposed by the Biden administration for its attacks in Ukraine.
Using a special license from the United States Treasury, the Russian Finance Ministry managed to pay bondholders via US and international banks despite the sanctions. In light of the cancellation of this waiver, all bondholders of the country’s foreign currency debt will not get their payments in US dollars.
This move has caused speculation that Russia might default on its foreign debt since it might not only be unable to pay US creditors but also will have challenges making payments to non-US bondholders as a result of the dominant role that the US financial institutions play in the global financial network.
Russia defaulted on its debt last in 1918 when the Bolshevik Party refused to repay loans originated by Czar Nicholas II. It is said that Russia owes nearly $20 billion in debt that is not held in rubles, and it has to pay interest payments that total almost $1 billion up to the end of 2022, with nearly $500 million due next month.
Calendar of Russia’s Coupon Payments in US dollar and EUR changed into dollars.
Russia’s Ministry of Finance was disgruntled by the United States’ refusal to renew the license, stating that payments on dollar-denominated bonds will be made entirely in rubles, in the equivalent of a dollar at the time of the specific payment; and then changed into dollars via the National Settlement Depository (NSD) as a paying agent.
A statement published on Telegram by the Finance Ministry read:
“The decision of the US Department of Treasury to refuse to renew the license allowing investors to receive payments on the government debt of the Russian Federation primarily violates the rights of foreign investors who have invested in Russian debt instruments. It also undermines confidence in Western financial infrastructure.”
Investors’ accounts were not credited with interest for debt maturing in 2026 or nearly 26.5 million euros ($28.5 million) for bonds that are maturing in 2036 as of May 27. The 30-day grace period has already kicked off. Nonetheless, based on the NSD, the funds were deducted from its account in favor of depositors, which means, in Russia’s eyes, that the obligations had already been met.
Speculations have come up that Russia is almost defaulting on its foreign debt. The NSD is registered as the holder of the bonds for the primary purpose of making principal or interest payments. This might support Russia’s claim that it has averted a case of default even if the funds are yet to be transferred to individual accounts.
In the case that Russia cannot make the coupon payments, it has the grace period to find a viable solution. Nonetheless, after the US sanctions exemption was eliminated, the options available to the Kremlin were considerably reduced.
In the meantime, Russia insists that it has cash and is ready to pay, declining to acknowledge any possibility of a default.
Anton Siluanov, Russian Finance Minister, said on May 30 that the country will continue servicing its external debt in rubles. He stated that Eurobond holders abroad need to open ruble and forex accounts with Russian banks in case they want to receive the payments in foreign currencies. That plan is similar to that of gas-for-rubles but in the opposite direction.
Russia May Accept International Crypto Payments
The Russian government is also looking into allowing crypto to be used to make international payments, as highlighted by a government official. Head of the financial policy department of the Ministry of Finance, Ivan Chebeskov, stated:
“The idea of using digital currencies in transactions for international settlements is being actively discussed.”
At a March 2022 press conference, Pavel Zavalny, the chairman of Russia’s Duma committee on energy, mentioned that Russia would be open to accepting bitcoins for its gas and oil exports. Nonetheless, the option would just be available to ‘friendly’ countries like China and the ‘unfriendly’ countries would need to pay in rubles, as Vladimir Putin highlighted in a previous statement.
Buy Bitcoin NowWhile commenting on amending the Ministry of Finance’s draft bill on crypto regulation, Russia’s tax officials proposed that crypto payments can be accepted for international trade contracts. The government is keen on letting crypto be used for international payments.
But, the Ministry of Finance insisted that the use of digital currencies as a method of payment on the territory of the Russian Federation is highly prohibited. Under the proposed regulation, digital currencies are considered an investment vehicle.
Russia has been busy trying to break away from dollar-based trade for a long time, Putin said in an interview in October last year:
“I believe the US makes a huge mistake in using the dollar as a sanction instrument. We are forced. We have no other choice but to move to transactions in other currencies.”
The Takeaway
The growing pressure on Russia as a result of the sanctions, heated debates between legislators and regulators within the nation, and the growing popularity of cryptocurrency in Russia have led many analysts to believe that crypto regulation in the nation is just a matter of time.
Regarding the mechanism for processing bond coupon payments, Russia does not have any options more immediate than to pay up its bondholders in rubles. In the case that this option fails for some reason, then a crypto solution could be its viable plan B.
