Russia Makes Dollar Bond Payment In An Attempt To Avoid Default

After the outbreak of the Russia-Ukraine war, nearly half of the Russian central bank’s foreign exchange reserves have been frozen by the West, thereby making it difficult for Moscow to service foreign currency debts.

On April 29th, the Russian Financial Ministry said they have made two foreign currency debt repayments totaling $649 million. Although Russia had repeatedly threatened to pay the interest in rubles, Moscow eventually fulfilled payment in US dollars in accordance with the contract. As a S&P report pointed out, Russia’s attempt to repay dollar-denominated bonds in rubles was tantamount to a “selective default” as investors were unlikely to exchange rubles for “USD equivalent to the initial due amount.”

While the U.S. sanctions on Russia have frozen its central bank’s foreign exchange reserves at American banks, the U.S. Treasury Department has allowed Russia to use the funds to fulfill its payment obligation for dollar-denominated bonds on a case-by-case basis.

However, the U.S. Treasury Department rejected Russia’s application to use the frozen foreign exchange reserves in early April, before it sought to pay the 2 Eurobonds in rubles. Some analysis indicated this move aimed to prohibit Russia from paying interest to its bondholders with its more than $600 million foreign exchange reserves held by U.S. financial institutions, forcing Russia to either drain its U.S. dollar reserves more rapidly or accept the first external debt default over the past century.