Russia may have avoided historic, $117M debt default for now

Russia appears to have averted a historic debt default after claiming on Friday that it fulfilled a critical interest rate payment on two dollar-denominated bonds.

Russia's Finance Ministry said it had paid the $117 million in interest on eurobonds to the London branch of Citibank, which is acting as a paying agent on the bonds. 

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It appeared highly likely earlier this week that Moscow would fail to meet its external debt obligations – which would Russia's first default on foreign debt since the 1917 Bolshevik Revolution – following a raft of financial sanctions from the U.S. and its European allies. 

Moscow's invasion of Ukraine three weeks ago, the biggest attack on a European state in decades, elicited a slew of economic penalties from Western nations, including cutting off a key part of the Central Bank of Russia by preventing it from selling dollars, euros and other foreign currencies in its roughly $630 billion reserve stockpile.

Russia has grasped for a way to soften the blow: the central bank more than doubled its key interest rate to 20% in early March after some banks were removed from the Swift financial system and the West froze a significant portion of its currency reserves.

The financial fallout prompted credit rating agencies to downgrade their long-term debt rating for the Russian government to "junk" status, with Fitch warning that international sanctions have brought a "huge shock to Russia's credit fundamentals." It noted additional sanctions remain a distinct possibility. 

But the holders of two Russian dollar bonds said coupon payments arrived Thursday, according to Bloomberg News, citing people familiar with the matter. Although the payment arrived one day later than the Wednesday deadline, the funds were received well within the 30-day grace period under the terms of the bond.

Russia's finance minister, Anton Siluanov, told Russian state media that Moscow had made good on its obligations to creditors. The ministry said it would comment later in the day on whether it made the payment to Citibank in London.

"We have the money, we made the payment, now the ball is in America's court," Siluanov said on Thursday.

Economists were uncertain how Russia would handle its debt obligations; Siluanov initially said Moscow would pay the dollar-denominated bonds in rubles or the Chinese yuan – which some experts argued constitutes a default. Siluanov accused Western nations of orchestrating the sanctions with the intention of creating a default that "has no real economic grounds."

However, JPMorgan Chase, the correspondent bank that links the Central Bank of Russia to Citigroup, received the full $117 million for both sovereign bonds' coupon payments and made the transfer to Citigroup, according to The Wall Street Journal.

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The Treasury Department has said that current U.S. sanctions do not prevent Russia from making debt payments.

However, there is still some risk of default for Russia: As the Journal reported, Russia could also default on a local-currency bond that was due for payment earlier this month but that foreign investors have not yet received. 

Fitch said that Moscow has 30 days to pay holders of its local-currency bond, which was due on March 2, until it declares the country in default.