Russia’s Creditors May Have To Choose Between Getting Paid In Rubles Or Not Getting Paid At All

Russia’s creditors face the unappetizing prospect of accepting debt payments in rubles after the U.S. Treasury decided Monday to block the Kremlin from using its dollar reserves.

The Russian currency crashed 40% in the days after President Vladimir Putin’s unprovoked attack on Ukraine but has mostly bounced back since. A default on the $636 million debt payment and further sanctions tied to alleged Russian atrocities could trigger another nosedive in the ruble’s value.

“If they can’t get their dollars, either because they’re blocked or Russia won’t pay them, and they are offered rubles and they can get access to them, they’d be smart to take the rubles,” said Jay Newman, a former portfolio manager for Elliott Management who spearheaded the hedge fund’s 15-year battle with the government of Argentina over bond payments. “Rubles at least are worth something.”

The U.S. Treasury froze Russian central bank assets held in the U.S. in February after the invasion of Ukraine, but made an exemption for debt payments that was set to expire on May 25. With Russia continuing its offensive for more than a month, however, and new images showing horrifying scenes of bodies of civilians on the streets of Bucha, Ukraine, the U.S. accelerated that timeline, blocking Russia from making debt payments to investors.

Until then, JPMorgan Chase and BNY Mellon, two New York-based banks, acted as go-betweens for Russian payments to creditors. Putin’s government continued to make payments on time throughout March, most recently with a $447 million coupon payment last week. Both JPMorgan and BNY Mellon declined to comment.

“On the one hand, there’s a sense that if a sanction target wants to use scarce resources to pay U.S. creditors back, why should we object?” said Robert Kahn, director of global macroeconomics at the Eurasia Group. “But if we’re making life easier for them by opening up these doorways, I do think that at moments like this, particularly in the context of the awful images we have seen in the last few days, the interest of creditors is just not given a very high priority.”

The Kremlin dismissed the notion on Wednesday that it’s at risk of not being able to make the payments during a 30-day grace period. Spokesperson Dmitry Peskov said Russia has “all necessary resources to service its debts” and insisted that payments could be paid in rubles if necessary. A U.S. Treasury spokesperson said the move will deplete the resources Putin is using to continue the war. “Russia must choose between draining remaining valuable dollar reserves or new revenue coming in, or default,” the Treasury spokesperson said.

If Russia elects not to pay, it wouldn’t be the first time — a 1987 Forbes story covered a 96-year-old woman who was still waiting to be paid for czarist bonds her husband had bought in 1919 shortly after Russia defaulted on its debt during the Bolshevik Revolution.

Anton Siluanov, Russia’s minister of finance, said on state TV in March that about $300 billion of the country’s $640 billion in gold and foreign reserves has been frozen by sanctions. If Russia still has access to about $340 billion in reserves, the country appears to have more than enough to cover its total of $40 billion owed in international bonds, but Kahn said it’s not that simple and expects defaults to begin in the coming weeks.

“Dollars in a Chinese bank or gold in Moscow may be in principle unblocked, but it’s hard for them to take those and use them to buy the things they need,” Khan said. “My sense is that the usable reserves are really far lower than what the minister said.”

Russia will still be able to use revenue from sales of commodities like wheat, palladium and oil to meet its debt obligations. The U.S. has blocked imports of Russian oil, but other importing countries haven’t followed suit.

Meanwhile, trading in dollar-denominated Russian corporate bonds has skyrocketed, with investors hunting for bargains despite the reputational risk. The average daily value of trades as of March 24 was double the same period a year before and the most in two years, according to Bloomberg.