Russian President Vladimir Putin signed Decree No. 394 on June 22, establishing the new mechanism for settlements under the sovereign bonds of the Russian Federation denominated in foreign currency (Eurobonds).
The new procedure authorizes the issuer of Eurobonds to make payments to a special type “I” account opened in the name of foreign depository institutions, such as Euroclear, at the Russian National Settlement Depository (under EU sanctions since June 2022). No consent from the foreign depository institution is required to open such an account, and the presence of a representative of the foreign depository institution is not necessary.
According to the Decree, the obligation of the Russian Federation “is deemed to be fulfilled” as of the date when the payment is made in Russian rubles to the type “I” account opened at the National Settlement Depository.
The Decree also provides that holders of Eurobonds are required to provide the National Settlement Depository with documents confirming their rights for Eurobonds in order to receive payment. The list of required documents is yet to be determined, but the Ministry of Finance of the Russian Federation already announced that it would include “a waiver of any claims in respect of the payment against the issuer of securities” as well as “full ownership structure.”
The amount in rubles will be indexed until the payment is actually made to the bondholder’s personal account. However, the indexation procedure has not yet been established.
For now, it is still unclear whether the foreign bondholders would be entitled to convert rubles into US dollars or euros and transfer the resulting amount freely out of the Russian Federation.
The Russian Federation purports to maintain its position that it shall not be liable for any potential problems with settlements under the sovereign debt. Effectively, this means that the Russian Federation would not recognize the event of default when the payment is made in rubles or when the payment fails to reach the end holders of its securities.
The problem goes back to May 20, when Russia made a $100 million coupon payment under the 2026 and 2036 Eurobonds issues. The payment in US dollars, however, was not processed due to sanctions. Later, it was announced that the US Treasury Department's Office of Foreign Assets Control decided not to prolong its waiver to the Russian Federation to pay its sovereign debt. The waiver expired on May 25, and the Russian Federation was looking for an alternative way to pay its sovereign obligations. Decree 394 effectively proves that no practical solution was found.
International rating agencies repeatedly announced that any failure to fulfill obligations in accordance with the terms of issue would constitute an event of default. This potentially includes situations when the payments are suspended, until the supporting documents and a waiver from claims are provided by the bondholders or when the currency of the payment is unilaterally changed.
On June 23, the Ministry of Finance of the Russian Federation already used the new mechanism to pay 12.51 billion rubles ($234.85 million) coupon payment under Eurobonds issues 2027 and 2047. Those issues denominated in US dollars do not allow payment in rubles. The default is, therefore, likely under these issues after the expiration of the 30-day grace period.
CROSS-DEFAULT AND POTENTIAL CLAIMS
On June 27, Moody's credit rating agency confirmed that Russia defaulted on its foreign debt. This refers to payments under 2026 and 2036 Eurobonds issues that became due on May 27.
The Russian Ministry of Finance refused to recognize the default event, arguing that the payment was made well in advance and at the time when the US Treasury Department's Office of Foreign Assets Control waiver was still effective. The Russian Ministry of Finance, therefore, argues that it used its best endeavors to make the payment and the payment did not reach the bondholders for reasons outside the control of the issuer.
It seems that this may already give rise to a series of litigations between Russia and the bondholders. However, even more importantly, that failure to pay may trigger a cross-default under other Russian obligations, leading to a situation when all payments would become due immediately. Even if Russia avoids a cross-default now after failing to pay its coupon payments under the 2026 and 2036 Eurobonds issues, there is a high chance that it might happen anyway after the 30-day grace period expires for the 2027 and 2047 Eurobonds issues.
This could prove to be bad news for those already having awards, decisions, and claims against the Russian Federation, as it will make the competition for Russian assets still remaining in Western countries even more severe.