Some Russian creditors receive interest payments on keenly-watched bonds

Payment was first test of whether Moscow would meet obligations following sanctions

Russia’s central bank in Moscow. Photograph: The New York Times

Some creditors have received payment, in dollars, of Russian bond coupons which fell due this week, Reuters reported on Thursday, meaning that the country may for now have averted what would have been its first sovereign bond default in a century.

Russia said earlier it had sent funds to cover $117 million (€106m) in coupon payments on two dollar-denominated sovereign bonds.

The payments, due on March 16th but with a 30-day grace period, were seen as the first test of whether Moscow will meet its debt obligations after Western sanctions hobbled its financial dealings.

“The coupon was paid, against my expectations, and in dollars,” one source told the news agency.

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Another person said the money had been received by a client who was a bondholder.

Some other creditors said they had yet to receive their funds but were optimistic they were on the way, noting they had received payments on hard currency bonds from a raft of state-run and private Russian companies in recent days.

Russia’s ability to make payments on its debt is being closely watched by markets around the world as ratings agencies and analysts warned that a default was imminent. The coupon payments due on March 16th were the first of several, with another $615 million due over the rest of the month.

A non-payment would mark the first default on foreign-currency bonds since the Bolsheviks repudiated the tzar's debts in 1918. Kremlin spokesman Dmitry Peskov said the nation has all the resources it needs to avoid a default.

Sanctions imposed over Moscow's invasion of Ukraine have cut Russia off from the global financial system and blocked the bulk of its gold and foreign exchange reserves, while Moscow has in turn imposed countermeasures – all of which complicate payments.

The finance ministry had planned to send the equivalent interest payment amount in roubles if dollar payments did not reach foreign bondholders, something credit rating agency Fitch said would constitute a sovereign default, if not corrected within a 30-day grace period.

Creditors

Generally a country pay creditors abroad by sending money to a correspondent bank, which transfers the funds to the paying agent of the security, before it goes to individual holders’ deposit accounts through settlement steps to confirm ownership of assets.

The raft of international sanctions had raised questions about whether such complex and multi-step transactions would run into difficulties, not least because Russia’s central bank is among those institutions targeted in Western sanctions.

Russia has 15 international bonds with a face value of about $40 billion outstanding, roughly half held by foreign investors. More than half of the bonds are listed on Euronext Dublin.

The first principal payment Russia is due to make since the country invaded Ukraine is due on April 4th, when a $2 billion bond matures. The bonds have a mix of terms and indentures. Bonds sold after Russia faced sanctions for its 2014 annexation of Crimea contain a provision for alternative currency payments. Those listed after 2018 have roubles as an alternative currency option.

A so-called non-payment event could trigger Russian debt default insurance policies known as credit default swaps (CDS) that investors take out for this kind of situation.

– Reuters