Russia mulls gas-to-ruble model for foreign Eurobond payments

  • Investors would open Russian FX and ruble accounts
  • Diagram to be presented before the next coupon payment due on June 23 – source
  • An investor doubts that this program can avoid an event of default

May 30 (Reuters) – Russia plans to pay Eurobond holders using the mechanism it uses to process payments for its gas in roubles, although investors said the move would not allow the Russia to avoid a historic default on its debt.

The program, according to the Kremlin and Russia’s finance minister, would allow Moscow to pay bondholders while bypassing Western payment infrastructure. It comes days after Washington decided not to extend a license that had allowed US creditors to receive bond payments while allowing Russia to avoid default.

This move by the US Treasury brought Russia closer to defaulting on its hard currency debt. Foreign Eurobond holders are now awaiting two coupon payments that fell due last week but have a 30-day grace period. Read more

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Russia says it has the money and is ready to pay, refusing any discussion of default. Finance Minister Anton Siluanov said on Monday that Moscow would continue to service its foreign debt in rubles.

But in order for foreign Eurobond holders to receive foreign currency payments in accordance with Russia’s obligations, they would have to open ruble and hard currency accounts in a Russian bank, he told the Vedomosti newspaper.

“As it happens with the payment of gas in rubles: we are credited with foreign currency, here it is exchanged for rubles on behalf of (the gas buyer), and this is how the payment takes place “, did he declare.

“The Eurobond settlement mechanism will work the same way, only the other way around.”

The money would be channeled through Russia’s National Settlement Depository (NSD), Siluanov told Vedomosti.

Unlike many Russian financial institutions, the NSD is not under Western sanctions. There will be no limit on the conversion of the ruble into other currencies and the program will soon be reviewed by the government, he said.

In a conference call with reporters, Kremlin spokesman Dmitry Peskov endorsed Siluanov’s plan but said the Finance Ministry would consult with bondholders before introducing it.

“There is money, there is a willingness to pay, whether in rubles or in a more convenient scheme for bondholders. It will all depend on those contacts,” Peskov said.

Russia’s Finance Minister Anton Siluanov speaks to reporters after talks with representatives of major Russian companies in Moscow, Russia August 24, 2018. REUTERS/Tatyana Makeyeva/File Photo

The finance ministry did not respond to a Reuters request for comment. A financial market source said Russia plans to present the program to investors before its next payments, on two bonds, fall due on June 23.


Russia has about $40 billion in international bonds outstanding, of which just under $2 billion in payments are due before the end of the year. Some of its bonds, issued after 2014, include provisions to be settled in NSD and in alternative currencies, including the rouble.

Bond terms usually state that all creditors are paid, and failure to do so can be considered a default. Investors said the default seems inevitable now that US creditors no longer have the right to accept Russian debt payments.

“It’s legally feasible as a way to get money for bondholders, but not as a way to avoid an event of default,” said a Europe-based investor.

However, European Union investors can still receive payments, said Zia Ullah, partner and head of corporate crime and investigations at law firm Eversheds Sutherland, “unless a bank under freeze assets are involved in the payment chain”.

Some European energy companies opened accounts in rubles at Russia’s Gazprombank, after the Kremlin demanded that “unfriendly” countries pay for gas in rubles or be cut off. Buyers must deposit euros or dollars into an account at a Russian bank, which converts the money into rubles. Read more

The financial market source said it has not been decided which bank will be used for Eurobond payments.

Ullah said Russia would not be able to make dollar payments because US banks are not allowed to do such transactions.

“Anything denominated in dollars should be paid for in a different currency…As long as you were comfortable accepting non-dollar payments, there was nothing stopping that,” he added.

But investors were skeptical, given the stigma attached to dealing with Russia.

“Legally it seems possible, but I don’t think people will notice,” said a Europe-based bondholder, calling the payment system a “difficult gray area”. “The reality is that for a global fund that has both US and European business, it would be difficult to accept this mechanism.”

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Reporting by Reuters and Sujata Rao, Jorgelina do Rosario; Editing by John Stonestreet, Catherine Evans and David Gregorio

Our standards: The Thomson Reuters Trust Principles.

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