Russia Works on New Bond Payment Mechanism to Avert Default - Report

Russia is planning to circumvent western sanctions that threaten to destroy its credit rating by allowing foreign investors to open accounts in both rubles and a foreign currency in a Russian bank.

The proposed bond-payment mechanism, which is a mirror image of the system in place for facilitating the natural gas exports, will help Russia avoid a default. Russian Finance Minister Anton Siluanov unveiled the new plan in an interview with the Vedomosti newspaper, according to Bloomberg.


"This is how it works for gas payments: we get foreign currency, then it is converted to rubles ... The Eurobond settlement mechanism will operate in the same way, but in the opposite direction," the minister said.

The Russian Central Bank
The Russian Central Bank Reuters

The move comes even as Russia is staring down a default after it missed coupon payments on bonds on Friday. A grace period of 30 days is in place, and at the end of this period Russia must find a solution lest it slips into a historic default.

If the new system is rolled out, investors will be able to access funds without any restrictions. The Russian government is working on the system currently.

Russia said last week it will service its debts in roubles after the US plugged the payment loophole that was in place after the sanctions were slapped on Russia in the aftermath of the Ukraine war.

Upcoming Payments

However, payments in roubles violated the contractual terms in some of Moscow's dollar bonds that were due for coupon payments last week.

The US had frozen foreign currency reserves held by the Russian central bank at U.S. financial institutions as part of the sanctions imposed on Moscow after the Ukraine war started. However, the Treasury Department had allowed the Russian government to use the funds to make coupon payments on dollar-denominated sovereign debt on a case-by-case basis, Reuters reported.

A $71 million interest payment was due on Friday but Russia had apparently made the payment in advance -- before the US exemptions expired.

Russian Rouble
Russian Rouble Pixabay

Another payment, which was worth 26.5 million euros, was also due on Friday but as per the contract the due could be paid in roubles.

However, Russia is facing three more major interest payments in June. The obligations under these total nearly $400 million. The catch is that these payments can only be made in dollars under the terms of the contract.

The Russian finance ministry has categorically stated that the Russian federation has the funds to make the payments on its sovereign bonds and the scenario of a default is a western manufactures one.