Despite strict economic sanctions, shrinking foreign exchange reserves and nervous banks, Russia has been keeping up with payments on its national debt, which confused expectations just a few weeks ago when rating agencies believed a default was imminent and the government said it was could repay its international loans in rubles.
“People are looking at this and scratching their heads,” said Michael Bolliger, chief investment officer for emerging markets at UBS Global Wealth Management. He said they are asking “how is this possible? And why” is Russia willing to repay?
Monday was expected to be a flashpoint for Russian debt, with more than $2 billion to be paid in US dollars. But last week, Russia bought back about three-quarters of its debt in exchange for rubles, a relatively unusual move that reduced its dollar commitments. There was still $552 million to be paid. The Treasury Department has not said whether the payment has been made.
Every payment Russia owes on its dollar-denominated debt since it invaded Ukraine has been scrutinized. Initial payments of $117 million in mid-March were delayed slightly after JPMorgan in New York and Citibank in London sought approval to complete the transactions.
But there is still a lot of focus on future payments. While Russia has shown willingness to repay its dollar-denominated debt, analysts have questioned whether sanctions imposed by US and European governments will ultimately hamper its ability to pay. The US government has made an exception to its sanctions policy to allow debt payments, but it will expire on May 25. Two days later, about $100 million in interest is due.
Russia has also lost access to about half of its $600 billion in currency and gold reserves due to sanctions against its central bank, but that has not hindered the country’s ability or willingness to send foreign exchange abroad. For starters, it still receives foreign exchange for natural gas exports, and Mr Bollinger said Russia’s ability to repay its debt is less of an issue for now.
But analysts can only speculate as to why Russia is willing to pay back amid stifling sanctions set to tighten.
“If at a later date they have the ambition to return to global capital markets, then it is better not to default,” said Kamakshya Trivedi, co-head of global currency, interest rates and emerging markets strategy at Goldman Sachs. . A default would end a centuries-old payment record.
But sanctions and Russian capital controls are snapping other debt payments. In early March, Russia said coupon payments for ruble-denominated debt would not be paid to foreign investors, and while documents on the Treasury Department’s website show that payments have been made, it is unclear whether foreign investors will have access to the money.
And then there are companies that have not been able to pay their debts on time because their owners are under sanctions. Severstal, the steel giant, ran out of time to solve a problem raised by Citibank to pay out, say, a $12.6 million coupon on a dollar-denominated bond.
And credit rating agencies have withdrawn their ratings for entities in Russia in recent weeks, in line with European Union sanctions. That will make it much more difficult for Russian companies to raise capital in the future, Mr Trivedi said.
“Without having credit rating agencies fully involved, the market you could access would be much, much smaller,” he said.