Russia Has Just Over a Day to Pay Two Foreign Bonds and Dodge Default

(Bloomberg) -- Russia has just over a day to get payments on two foreign bonds to investors and dodge a default in a closely watched struggle with sanctions.

A grace period to transfer $650 million in coupon and principal payments expires on May 4 after the funds were initially blocked in early April. Russia's first foreign debt default in more than a century had looked all but certain until a shock announcement late last week by the Russian Finance Ministry that the cash was finally moving through the financial system.

However, the dollars have still to complete the final steps. Payment was yet to be received by at least one of the clearing houses as of Monday afternoon in Europe, according to a person familiar with the matter who asked not to be named as they are not authorized to discuss it publicly.

The complications are the result of wide-ranging financial and economic penalties imposed on Russia after it invaded Ukraine. They include sanctions on some of the nation's biggest lenders, asset seizures, and a freeze on the country's foreign reserves.

The countdown to a default started when JPMorgan Chase & Co. halted the payments on the bonds under orders of the U.S. Treasury. Russia tried to get around the issue by paying in rubles, but rating agencies called that out as a breach of the bonds' terms as the clock ticked down on the 30-day grace period.

Then, with days remaining, Russia tapped its domestic dollar holdings and announced on Friday that it had transferred the cash to its foreign paying agent. That fits with the goals of the U.S. Treasury, which is allowing the transfer because it forces Russia to fork over local reserves that might otherwise have been used to fund the war effort.

The funds cover repayment of a bond due in 2022 and a coupon on one maturing in 2042. If the money makes it to bondholders, Russia will avoid its first foreign-currency debt delinquency since the Bolsheviks came to power and repudiated the Czars' borrowings in 1918.

It may prove a temporary respite.

U.S. sanctions currently include a broad exemption for sovereign bond payments. That runs out on May 25, and the Treasury's Office of Foreign Assets Control hasn't said if it will be extended. If it isn't, that raises a major hurdle for payments due just days later for interest owed on sovereign dollar and euro notes.