Russia appeared to avoid a default this week after it made interest payments totaling $117 million due on two bonds denominated in U.S. dollars.
JPMorgan Chase received and processed the payments on Wednesday after U.S. authorities granted it permission to do so, said a person with knowledge of the payment, who requested anonymity because of the sensitivity of the situation.
The person said JPMorgan had then sent the payments to Citigroup’s London office, which Russia’s foreign ministry said would distribute funds to bondholders. Citigroup declined to comment.
The process for making a routine coupon payment came under intense scrutiny because severe Western sanctions, imposed on Russia after its invasion of Ukraine, have placed limits on Moscow’s financial ties to U.S. and European banks.
Ratings agencies have slashed Russia’s debt to junk status and have warned that a default was possible; a default on foreign debt would be the country’s first since the 1917 Russian Revolution.
The improved likelihood of payment on the bonds was reflected in their rising price on Thursday, though trading was limited. One of the bond issues, maturing in 2023, climbed to about 50 cents on the dollar, after trading closer to 20 cents a week ago. Another issue, maturing in 2043, rose to about 47 cents on the dollar, after climbing on Wednesday amid cease-fire talks.
Russia has about $40 billion in foreign currency sovereign debt, half of which is owned by overseas investors. And Russian corporations have accumulated $100 million in foreign currency debt, JPMorgan estimates, with about a fifth owned by overseas investors.
Even if this week’s payment hadn’t gone through, Moscow had a 30-day grace period before a default would be confirmed. The U.S. Treasury has said the sanctions allow for payments to be made, at least until late May.
Russia faces more scheduled bond payments: It has about $4.6 billion in dollar and euro debt payments to make this year, according to JPMorgan analysts, including $2 billion for a bond that matures on April 4.
Russian government bonds were considered investment grade until a few weeks ago and were included in indexes used to benchmark other funds. They have since been dropped from these indexes, which will force some investors to sell the bonds.
Still, the exposure of international investors to Russian assets had already dropped before the war in Ukraine, since sanctions were imposed in 2014 because of the annexation of Crimea.
Western sanctions imposed since Russia invaded Ukraine last month have isolated the country financially, driven down the value of the ruble and cut off Moscow’s access to about half its foreign currency reserves. Russia warned this week that it might make dollar- or euro-denominated bond payments in rubles.
Ratings agencies said paying in rubles instead of dollars would count as a default.
A bond default would further harm Russia’s standing with investors and greatly increase the amount of interest Russia would have to pay in future bond issues once it had access to dollar and euro markets again. But analysts say the sanctions, exclusion from index funds and recent capital controls imposed by the government have already made the country essentially untouchable for investors.