Russia to make foreign debt payments in Rubles after US ends exemption

Russia said that it will pay its foreign debt in rubles after the United States ended an exemption allowing Moscow to make the payments in dollars held in Russia.

On Tuesday, the US Treasury announced to close the escape clause to the drastic financial sanctions imposed on Russia after it sent troops to Ukraine, pushing Russia closer to default.

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“Noting that the refusal to extend this licence makes it impossible to continue servicing government foreign debt in US dollars, payments will be carried out in Russia’s currency,” the finance ministry said in a statement on Telegram.

There would be a possibility to later convert payments into the original currency using a Russian financial institution as the paying agent, the ministry added.

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Western sanctions on Russia have largely cut the country off from the international financial system, preventing Moscow from paying its foreign creditors with funds held in US banks.

The US move eliminated the final exemption, which was forcing the Russian government to drain its war chest of foreign currency reserves to make payments.

Anton Siluanov, Finance Minister of Russia said that the current situation was “artificially created by an unfriendly country”.

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He added that it “primarily hurts the rights of foreign investors in Russian debt instruments”.

Simulanov stressed the current situation has “nothing in common” with 1998 when Russia defaulted on its ruble-denominated debt amid a broader financial crisis.

“Now we have money and a desire to make payments, too,” the finance minister said, adding that the step would not affect Russians’ quality of life.

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Last week, US Treasury Secretary Janet Yellen said that “if Russia is unable to find a legal way to make these payments… they technically default on their debt.”

The Russian government has tried to pay in local currency, but many of the bonds do not allow repayment in rubles.

The next debt service deadline on May 27 is for 100 million euros in interest on two bonds, one of them can only be paid in dollars, euros, pounds or Swiss francs, while the other can be paid in rubles.

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According to a Reuters report, the Russian Finance Ministry transferred funds abroad early to make the payments and avoid default. About $400 million in interest is due in late June.

After a 15-30 day grace period following a missed payment, the country is likely to be declared in default, further degrading its financial position and allowing creditors to take legal action to recover the funds.

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Russia last defaulted on its foreign currency debt in 1918, when Bolshevik revolutionary leader Vladimir Lenin refused to recognize the obligations of the deposed tsar’s regime.