Russia’s closely watched dollar payments on two bonds are trickling through to investors after the country dipped into its local holdings of the U.S. currency and sidestepped its first foreign default in a century.

The transfer of the US$650 million had got tangled up in the wide-ranging sanctions imposed after the invasion of Ukraine. And despite the 11th-hour escape before a Wednesday deadline to get the funds to creditors, Russia could face bigger hurdles within weeks that scupper future payments.

For now, it appears money is getting through. Three investors said Tuesday their custodian banks had received payments, asking not to be identified discussing private transactions. Major international clearinghouses have received and processed payments for the eurobonds due in 2022 and 2042, according to people familiar with the situation.

The bond controversy kicked off when the payments from U.S. accounts were blocked by the Treasury in early April. Russia tried to pay in rubles, but that was deemed a breach of contract, leading to legal threats from Moscow, warnings from ratings firms and an apparent one-way path to default.

Then, with days remaining before a 30-day grace period expired, Russia unexpectedly tapped its domestic dollar reserves and the money started to flow to waiting investors.

Russia could still get tripped up by the sanctions before the end of this month. That’s because an exemption in U.S. restrictions allowing interest and related payments to holders of Russian bonds runs out on May 25, and the Treasury hasn’t yet decided whether to extend the current broad carve-out.

Office of Foreign Assets Control FAQ

  • General License 9A “authorizes U.S. persons to receive interest, dividend, or maturity payments on debt or equity of the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, and the Ministry of Finance of the Russian Federation through 12:01 a.m. eastern daylight time on May 25, 2022.  After May 25, 2022, U.S. persons would require a specific license to continue to receive such payments.”

While a default won’t alter Russia’s standing -- the country is already a political and economic pariah across much of the western world -- it would be a symbolic moment in the financial battle that’s been playing out since Russia invaded Ukraine.

The U.S., the European Union and others are using the global banking system to cut Russia off from its money and squeeze Vladimir Putin’s resources, and that will feed into the decision about the May 25 deadline. 

The U.S. will have to decide whether it’s better to allow payments to continue so Russia drains its dollar cash pile, or let it trip into default and carry that financial stigma for years, if not decades.

“The fact that Russia is attempting to make the payments in U.S. dollars indicates to us that they do want to avoid a default,” Morgan Stanley’s global head of emerging-market sovereign credit strategy Simon Waever wrote in a note late Monday.



The next payments are due on May 27 for bonds maturing in 2026 and 2036 -- two days after the OFAC exemption is set to expire. 

Unlike the bonds in question today, the contractual terms of the 2026 and the 2036 bonds potentially give Russia other options if it cannot pay using usual routes for reasons beyond its control. 

For the euro-denominated 2036 bond, that includes using rubles as a last resort. The dollar-denominated 2026 bond also allows for payment in euros, Swiss francs or pound sterling, as well as for interest payments in dollars to accounts outside of New York such as Switzerland, the U.K. or the European Union. 

“Russia could therefore argue that paying dollars to the alternative locations is still allowed under the terms of the bond,” wrote Waever.

Alternative Payment Currency Event

2026: ...if, for reasons beyond its control, the Russian Federation is unable to make payments of principal or interest in respect of the Bonds in U.S. dollars, the Russian Federation shall make such payments in Euros, Pound sterling or Swiss francs (the “Alternative Payment Currency”)...

2036: ...if, for reasons beyond its control, the Russian Federation is unable to make payments of principal or interest in respect of the Bonds in euros, the Russian Federation shall make such payments in U.S. dollars, Pound sterling or Swiss francs or, if for reasons beyond its control the Russian Federation is unable to make payments of principal or interest in respect of the Bonds in any of these currencies, in Russian roubles...

Amid such uncertainty about the sanctions, any banks involved in moving Russian funds or processing payments will tread carefully, and seek authorization for any action.

“In the end, it will be up to OFAC to decide as banks are likely to pre-clear any transactions given the potential risks,” Waever said.