It is true that the Russian state transferred the interest on a dollar bond in the amount of 102 million dollars to the Russian payment processor National Settlement Depository (NSD) this week.

But doubts are growing on the financial market that the Kremlin will be able to pay for its foreign currency bonds in foreign currencies in the long run.

And the clock is ticking: On April 4, ie next Monday, the Russian state has to repay a debt instrument worth 2 billion dollars.

Markus Fruehauf

Editor in Business.

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So far, the Russian Ministry of Finance has been sending signals that a payment default can be expected.

On Wednesday, Russian Finance Minister Anton Siluanov defended the offer to repay the bond in rubles and not in dollars, as stipulated in the bond terms.

This will prevent discrimination against Russian creditors, he said.

After all, their payments to the processing house Euroclear are frozen because of the western sanctions.

However, according to the definition of the leading rating agencies S&P, Moody's and Fitch, paying interest or principal in a currency other than that agreed in the bond terms constitutes a default. According to the Bloomberg news agency, there is no ruble option for the upcoming bond -Payment, such as has been included in newly issued Russian government bonds in recent years.

It would be Russia's first default since the October Revolution of 1917, when the Bolsheviks failed to recognize the Tsarist debt.

Grace period of 30 days

It remains unclear whether Russia only offers payment in rubles but has not yet made a final decision on this.

The Reuters news agency refers to an insider, according to which the majority of the creditors of the bond that is now due come from Russia.

Then the payment of the remaining amount to the foreign investors in dollars would be possible.

In addition, 30 days must elapse after the April 4 payment deadline in which the creditors who insist on dollars do not receive payment in that currency.

Only then is the non-payment officially certain.

However, doubts are growing in the markets that after the tightening of sanctions, Russia will have enough foreign exchange to be able to make all outstanding payments on foreign currency bonds this year.

After all, the country can no longer fall back on the western stock exchange infrastructure.

Securities processor Clearstream, a subsidiary of Deutsche Boerse, blocked the accounts of Russian payment processor NSD last week.

This means that NSD can no longer forward payments from the Russian state to western creditors.

American correspondent banks such as JP Morgan and Citi will soon no longer be able to transfer interest payments from the Russian state to investors.

Because the exemption from the US Treasury Department, according to which American addresses can receive debt payments from the Russian central bank, the sovereign wealth fund or the Treasury Department, expires on May 25th.

Sanctions increase the risk

Many investors are wondering whether Russia is even willing to do this.

After President Vladimir Putin announced last week that he would only deliver gas and oil to the West against payment in rubles, it has become more likely that Russia will only want to service foreign currency debt in its own currency.

"However, the longer the sanctions last and further restrict access to capital inflows and foreign exchange, the greater the risk of a default for Russia becomes," says Gaël Binot, portfolio manager for emerging market bonds at asset manager La Française.

Given the extreme tensions, he says it is difficult to assess the Kremlin's future intentions for a voluntary default.

"Should this happen, the country's reputation would be damaged and the default would have a lasting impact on the future financing costs of the Russian state for international investors." A voluntary default would mean that the Russian state would refrain from normalizing relations with the West in the short term , adds Binot.