Russia has completed a closely watched bond payment, the Finance Ministry said Thursday, avoiding what would have been the country’s first default on its foreign debt obligations in more than a century.
“A payment order for the payment of coupon income on the Russian Federation’s external bond loans … in the total amount of $117.2 million … was sent to a foreign correspondent bank on March 14, 2022 and has been executed,” the Finance Ministry said in a statement.
Russia had previously touted the idea of defaulting on its government debt in response to the imposition of tough Western sanctions, including the freezing of around $300 billion of Russia’s Central Bank reserves.
Finance Minister Anton Siluanov raised the prospect of either paying bond holders in rubles — which investors largely agreed would constitute a technical default, as it is not allowed under the terms of the bond contract — or issuing the order to pay the bonds out of the country’s frozen assets.
“Russia blinked. It used resources in its limited war chest, beyond the reach of Western sanctions to make the payment,” said Timothy Ash, a senior emerging markets strategist and government debt expert with Blue Bay Asset Management.
“Guess Russia realized the price of default was much larger.”
It remained unclear whether bondholders had received the payments Thursday morning, which had not arrived by the original due date of Wednesday evening, investors said. In its statement the Finance Ministry said it would provide an update later as to whether the funds had been credited.
The Russian government later said that the payment had been “fulfilled” in U.S. dollars. In a statement on its official Telegram channel, the government added: “there are no problems with servicing the national debt.”
The payments, due Wednesday, were the first major installments due on Russia’s foreign debt since it invaded Ukraine, and seen as a crucial indicator of Russia’s commitment to continue servicing its international financial obligations.
Echoes of 1998 — when Russia last defaulted on some of its debt — have swirled as the invasion and subsequent sanctions have pushed the Russian economy to the brink of a deep crisis. That year, Russia defaulted on its locally issued debt; the last time Russia failed to pay international bondholders was after the Bolshevik Revolution in 1917.
International investors have reduced their exposure to Russian government debt since Moscow annexed Crimea in 2014, and Moscow owes less than $20 billion in foreign currency to foreign investors, according to calculations by the Institute of International Finance.
Meanwhile, Russian corporates — including state-owned hydrocarbon giants like Gazprom — have around $100 billion in outstanding hard currency loans, investment bank JP Morgan estimates.