Russia eyes new bond-payment system in bid to avoid historic default

Russia plans to use a new bond payment system that would pay off bondholders in rubles, but who will then receive these payments in dollars or euros.

The move comes as Russia tries to avoid sinking into a historic default that looks certain due to sanctions imposed on Moscow by the US and other nations.

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To handle its Eurobond obligations, Russia thus wants to apply the same system it’s currently using to process gas payments, according to the report published Monday.

Under the mechanism, Russia will require investors to open two accounts at a local bank – one in a foreign currency and then another denominated in ruble. The investor will then need to agree to the exchange process by giving instructions to the bank.

Finance Minister Anton Siluanov, in comments reported by Russian newspaper Vedomosti, explained:

As happens with paying for gas in rubles: we are credited with foreign currency, here it is exchanged for rubles…The Eurobond settlement mechanism will operate in the same manner, only in the other direction.”

He added the system’s development is being finalized and that once the government approves it, the next step will be to present it to the investors.

Bypassing western payments system

According to Siluanov, the bond payment system is designed to help Russia work its way around the western payments infrastructure. To achieve this, the country will use its National Settlement Depository (NSD). The system is not under sanctions and thus will allow for virtually unlimited conversion of rubles into forex.

This is likely to be very critical for Russia, which has since February managed to honor its foreign currency bond payments. However, things took a turn last week when the US Treasury department announced it would block Russia from paying its US bondholders.

The decision threatens to see Russia hit a historic default worth billions of dollars, the first time this would happen in over a century – last time was in 1918.

Russia owes roughly $40 billion in foreign bonds, with nearly $2 billion due before year-end.