Russia Readies New Bond-Payment Plan in Bid to Avoid Default

(Bloomberg) — Russia is planning a bond-payment mechanism to sidestep US sanctions and a potential default as a grace period ticks down on its latest missed coupons.

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The proposal would allow foreign investors to open accounts in Russian banks in both rubles and hard currency, Finance Minister Anton Siluanov said in an interview with the Vedomosti newspaper. Unlike the previous payment system, investors will be able to access the funds without restriction, he was cited as saying.

Russia is back in default countdown as coupon payments in euros and dollars worth about $100 million had yet to trickle through to foreign investors’ accounts as of Friday evening, effectively triggering a 30-day grace period.

The transfers were complicated last week when the US Treasury allowed a sanctions loophole to expire, barring US banks and individuals from accepting bond payments from Russia’s government.

The next slate of payments — worth about $400 million and due in June — will take place “outside Western financial infrastructure,” Siluanov said in an interview shown Monday by Chinese state-run broadcaster CGTN.

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The proposed structure is a reverse-image of the way European nations currently pay for Russian gas, he said.

“This is how it works for gas payments: we get foreign currency, then it is converted to rubles” on behalf of the gas buyer, Vedomosti cited him as saying. “The Eurobond settlement mechanism will operate in the same way, but in the opposite direction.”

The plan is still being discussed by the government, after which it will be presented to investors and will be ready before the next coupons on June 23-24.

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“Unlike gas supplies, getting bond interest payments might not be so critical in most cases,” said Alexander Dmitrenko, a partner at Ashurst LLP. “So on the balance of pros and cons, holders might take a more conservative approach.”

For now, investors are watching their accounts for the dollar and euro payments that were due on Friday. Then attention turns to the end of next month.

Two payments due June 23 have clauses that allow servicing in euros, pounds sterling or Swiss francs. Their terms also stipulate that the funds will land with the local paying agent, the NSD.

One day later, $159 million comes due that can only be paid in dollars, via a unit of JPMorgan as foreign paying agent.

“I doubt it will work — for most foreign investors, the procedure for opening an account with a Russian bank may be too difficult,” said Alexey Tretyakov, a portfolio manager at Aricapital in Moscow.

“Only the largest institutional investors can cope. But they may face reputation risks and risks of sanctions violations when dealing with Russian counterparts.”

(Updates with more comment from Siluanov, analyst comments)

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