Russian bonds rally on signs Moscow will avoid first default since 1998

Russian bonds extended their recent rally on Friday as investors bet Moscow had succeeded in making interest payments on its dollar debt this week, staving off the country’s first sovereign default since 1998.

The gains came after JPMorgan processed the $117mn in coupon payments that had been due on two bonds on Wednesday, passing the money to payment agent Citigroup for distribution to investors, according to a person familiar with the situation. JPMorgan made the decision to process the payment after consulting with US authorities, the person added.

The two bonds, which mature in 2023 and 2043, traded at about 50 cents on the dollar on Friday — up from roughly 20 cents a week ago — with the rest of Russia’s $38.5bn of foreign currency debt climbing to similar levels. While the bonds continue to trade at distressed levels, investors have reassessed a market that was priced for immediate default.

“The Russian government has demonstrated a very strong willingness to pay,” said Marcelo Assalin, head of emerging market debt at William Blair. “They clearly didn’t want to be labelled a defaulter. The question is how long they will be allowed to continue.”

The Russian finance ministry said on Friday that Citi had received the funds to make the coupon payments. “Thus, the ministry has honoured obligations to service government securities in full in accordance with the issuance documentation for eurobond issues,” it said, according to Russian news agency Interfax.

Citi and JPMorgan declined to comment.

Monthly coupons and maturities for Russia’s foreign-currency government bonds

One European investor said on Friday morning that they had not yet received the interest payment, but expected it to arrive. Russia has a 30-day grace period from Wednesday to make the payment and avoid defaulting. US sanctions restrict investors from trading Russian bonds issued after March 1, but they are still allowed to trade any that were sold before that date.

Despite the apparent progress towards making Wednesday’s coupon payments, rating agency S&P Global downgraded Russia’s credit rating to double C late on Thursday, citing “reported difficulties meeting debt-service payments on the due date”.

“We think that debt service payments on Russia’s eurobonds due in the next few weeks may face similar technical difficulties,” S&P said, adding that an exemption in US sanctions that allows US investors to receive interest payment from Russia expires on May 25, complicating further debt service after that date.

Russia owes a further $615mn in interest payments this month, including $66mn on Monday, and faces a $2bn bond repayment on April 4.

Monday’s coupon is on a bond whose terms contain a “fallback” clause allowing repayment in roubles if Russia is unable to pay in dollars. Russia’s finance minister Anton Siluanov said earlier in the week that it would be “absolutely fair” to make repayments in roubles until western sanctions freezing the assets of Russia’s central bank are lifted, leading to concerns that Moscow would attempt to make Wednesday’s payments in the Russian currency.


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