Domestic Bonds

Russia proposes a foreign debt payment system similar to that of gas

MOSCOW — Russia said on Monday it could use an arrangement similar to that used for its gas supply payments to pay its dollar-denominated external debts.

Business daily Vedomosti quoted Finance Minister Anton Siluanov as saying that Russia will offer holders of its Eurobonds to accept a payment system that bypasses Western financial infrastructure.

Russia previously offered customers receiving its natural gas to open an account in dollars or euros with the third Russian bank, Gazprombank, and then a second account in rubles. The importer would pay the gas bill in euros or dollars and ask the bank to exchange the money for rubles.

The system was set up on the orders of Russian President Vladimir Putin and aims to avoid a risk of freezing gas payments as part of Western sanctions against Russia for its action in Ukraine.

Siluanov told Vedomosti that a mechanism similar to this will be put in place for Eurobond holders, who will be offered to open currency and ruble accounts in a Russian bank.

“In payments for gas, we are credited with foreign currencies and they are converted into rubles,” Vedomosti quoted Siluanov as saying. “The Eurobond settlement mechanism will work the same way, just the other way around.”

He said the payments will be made through the State Repository for Russian Settlements.

Asked about Siluanov’s comments, Kremlin spokesman Dmitry Peskov told reporters that “the practice of payments for gas turned out to be convenient for both the seller and the buyers, so why not use it in the opposite form”.

On Wednesday, the US Treasury Department led by Janet Yellen authorized the expiration of a license allowing Russia to continue paying its creditors through US banks. The license applied to US investors and international investors who have debts or obligations denominated in dollars.

Russia says it will pay dollar-denominated foreign debt in rubles, a move that foreign investors are likely to view as a default.

The US Treasury Department led by Janet Yellen allowed a license that allowed Russia to continue to pay its creditors through US banks to expire on Wednesday. The license applied to US investors and international investors who have debts or obligations denominated in dollars.

Russia responded to the move by saying it would pay in rubles and offer “the possibility of later conversion into the original currency”, and Siluanov made that clear on Monday by outlining the proposed payment mechanism.

It is unclear whether the Russian offer will be accepted by Eurobond holders, allowing Russia to avoid a default.

Russia has not defaulted on its international debts since the Bolshevik Revolution of 1917, when the Russian Empire collapsed and the Soviet Union was created. Russia defaulted on its domestic debts in the late 1990s during the Asian financial crisis, but was able to recover from that default with the help of international aid.