The fact that Moscow sent money to its paying agent does not mean that it has fulfilled its debt obligations. Last Friday, Russia turned an unexpected trick. After weeks of criticism of the sanctions, she unexpectedly announced that she would pay $ 649 million to her bondholders, which was due on April 4.
No one expected Moscow to try to avert a formal default in the last days of the grace period. And to put it mildly, writes the Financial Times. Journalists of world economic publications have already prepared articles about the Russian default, which was to formally occur on May 4. However, journalists from the Financial Times asked about the debt future of Russia expert in such cases Lee Bachgate. He explained that the country could still default on Wednesday.
Russia's debt repayments surprised investors because the US Treasury would not allow Moscow to use its frozen reserves for this. The Russian government has clearly stated that it intends to settle with creditors in rubles. Earlier, the US Treasury Department's Foreign Assets Control Service allowed some payments to be made from frozen Russian accounts. But then she tightened her policy. Only unfrozen dollars in Russia could be used to repay public debt. And this would mean the outflow of currency from the country.
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In fact, US officials have confirmed that Russia's payment on bonds was made with dollars stored in Russia itself. Consequently, this currency can no longer be used to finance the war against Ukraine. The transaction was not authorized by US officials. However, it did not formally violate the sanctions regime. But according to experts, Russia “blinked” too late to prevent default.
Bachgate points to the fact that the London bank Citi acted as a “paying agent”, receiving money from Russia for distribution among investors. According to the expert, the bank will withhold the money and will not send it to the owners of Russian debt until it receives a clear “green light” from the US Treasury Department's Foreign Assets Control Service. In turn, the service, before giving the necessary permits, will check whether all the money really comes from unfrozen accounts. And Bachgate doubts that this work will be completed by Wednesday, when the grace period ends.
The fiscal or paying agent represents Russia's interests, not the bondholders. Legal analysis could be completely different if Moscow used a trust structure. In other words, because Citi is formally acting on behalf of Moscow, not its creditors, placing money in a bank account is not enough to be considered a financial obligation. This means that it is time to say “hello” to the first Russian default since 1998.
Of course, it will not be long. Because Citi will eventually get permission from US regulators to distribute money among Russia's creditors. In turn, the owners of Russian debt will not run to court, knowing that in the coming days will receive the promised amounts. Therefore, despite the expectations for buyers and sellers of credit default swaps, the practical consequences of Russia's default will be quite limited. So far.
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The fact is that the United States wants Russia to default no less than Russia is trying to avoid it. As a result, US regulators may tighten their policies, which will prevent Russia from servicing its debts, even through unfrozen accounts. For example, American organizations may be banned from receiving any Russian money. Bachgate believes that such an approach would be correct. Because “pumping out” dollars from Russia is a blessing. However, even if regulators maintain a loophole that allows Moscow to service its debts with the help of foreign exchange reserves available on Russian territory, according to the expert, Russia's default is still inevitable.
Recall the pre-default situation in Russia has developed already as of March 16 , when preliminary payments on external debt were made. Given the sanctions, experts doubted that Russia would be able to make these payments in dollars. However, at the last minute, Russia found the necessary amount and made payments in dollars.
At the same time, experts postponed the possible default of the country to April 4, calling future payments unlikely .
On April 4, the non-payment of debt obligations in dollars launched a grace period of 30 days, after which there will be a default , which will cut off Russia, which is already cut off from the financial markets, pending litigation and payments.
