After the freezing of foreign exchange assets of the Central Bank, the Ministry of Finance has already paid almost $ 300 million to holders of its dollar bonds. Payments come from blocked reserves, RBC sources say.

The source of dollar payments on Russia’s external public debt, made by the Ministry of Finance in March, despite the sanctions, was the frozen foreign exchange reserves of the Bank of Russia, a source close to the ministry told RBC and confirmed by a federal official familiar with the payment scheme.

When paying investors, the funds are “written off from our frozen foreign exchange reserves,” RBC’s source said.

RBC was unable to get a response from the US Treasury, which in early March, with reservations, allowed investors to receive debt payments from Russia.

“Payments were made from the federal budget using the accounts of the Bank of Russia,” the press service of the Russian Ministry of Finance told RBC. RBC sent a request to the Central Bank.

“Under the condition of defrosting”

Finance Minister Anton Siluanov said on March 10 that the ministry would first issue payment orders to agents in accordance with the issue documentation in order to make the payment in dollars. “This will be possible only if the currency accounts of the Central Bank and the government are unfrozen,” Siluanov said. Otherwise, the Ministry of Finance was going to pay in rubles. On March 14, the agency sent a payment order to the American correspondent bank JPMorgan Chase for $117 million, and it was executed.

CNN noted that “the funds that the country used to pay off debt came from the frozen foreign assets of Russia that fell under sanctions.” A spokesman for the US Treasury said that Washington would allow these payments. If the US were to force Moscow to pay creditors from foreign reserves that are not blocked, it would mean that more reserves are being moved out of the control of the Russian authorities, however, it appears that recent payments by the Treasury were made from blocked reserves, writes BlueBay Asset Management strategist Timothy Ash.

According to RBC’s estimates, since mid-March, Russia has paid $285 million in coupon income on several Eurobond issues. Western investors received them, but Russian holders of currency government bonds have not yet received payments due to the suspension of settlements by Western clearing systems amid sanctions. On April 4, the Ministry of Finance will have to redeem $2 billion worth of Eurobonds. The Ministry of Finance has already announced a public offer for this issue on voluntary redemption of these securities for rubles, which was valid until the evening of March 30. The purpose of such an operation is to ensure the return of money to holders in Russia.

At the last stage, the settlement system, with which the Ministry of Finance agreed during the initial placement of securities, must transfer money to the ultimate holders of securities. Normally, this is a routine procedure, but not now: Euroclear has not yet made settlements with Russian investors due to sanctions checks, RBC’s source explains. Russian residents own about half of all sovereign Eurobonds in circulation, follows from the data of the Bank of Russia.

Unanswered questions

Brian O’Toole, a former senior adviser to OFAC’s Financial Sanctions Unit at the US Treasury Department, told RBC that the US could legally allow limited CBR accounts to be used for this in a separate private decision, and “this is strange from the point of view of Washington’s foreign policy goals.” Russia could pay investors dollars from frozen reserves. The general OFAC license (.pdf), which generally allowed creditors to accept debt payments from Russia until May 25, contains a clause: in order to make such payments, money cannot be debited from the accounts of the Central Bank, the Ministry of Finance or the National Welfare Fund in American financial institutions. The frozen dollar assets of the Central Bank, by definition, are held by the American Institute. Russia still has significant hard currency earnings from exports and there were several ways to pay dollar coupons without using blocked assets, the expert believes: for example, the Central Bank could simply sell rubles, buy dollars with them and use them to pay off obligations to foreign creditors .

Also, Russia could give an intermediate counterparty (an American bank) rubles, the bank could buy dollars on them on the domestic Russian market and transfer them to creditors, Oleg Shibanov, professor of finance at NES, agrees. To circumvent the ban on debiting frozen accounts, Russia could use an institution acting on behalf of the Russian government as part of the execution of debt obligations, says George Voloshin, director of the French branch of the consulting company Aperio Intelligence. Another US Treasury general license involving VEB.RF (which came under US blocking sanctions in late February) is broad enough in principle to allow it to use a dollar account for sovereign debt payments, O’Toole says.

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