Russia Comes Up With a New Bond-Payment Plan 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 would be able to access the funds without restriction, he was cited as saying.

The mechanism is still being discussed by the government, after which it will be presented to investors.

Russia is back in default countdown as coupon payments in euros and dollars worth about $100 million hadn’t landed in 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.

According to Siluanov, the proposed structure is a reverse-image of the way European nations currently pay for Russian gas, Vedomosti reported.

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

Euro Transfers

It’s unclear how banks involved in transferring dollar payments would work with the proposal. And the question still remains whether the tightened US restrictions will also restrict payments in euros.

In an interview with Russia-24 television on Friday, Siluanov said euro transfers won’t be affected, because the European Union hasn’t adopted restrictions on payments in the common currency. The new mechanism will be ready before the next coupons on dollar bonds come due on June 23-24, Siluanov said.

“This mechanism seems to work on paper, but these are all technicality issues,” said Carl Wong, head of fixed income at Avenue Asset Management in Hong Kong. “The ultimate issue is when Russia stops this war and if it doesn’t, how long it could avoid a collapse in the financial system.”

(Updates with details on payment in second paragraph.)