Russian bank VTB slips into default, pays rubles on dollar bonds

  • VTB, Russia’s second-largest bank, took a big step toward default by paying holders of its dollar bonds in roubles.
  • The bank said it was “completely cut off from foreign US dollar payment infrastructure” and therefore had no choice.
  • Analysts expect a wave of corporate defaults in Russia, although companies have argued they are being artificially forced into the situation by Western sanctions.

VTB, Russia’s second-largest bank, took a major step toward default after having to make dollar bond payments in roubles.

The lender was to pay $52 million in interest on dollar-denominated bonds, but said Wednesday it had instead sent the money in rubles to special accounts reserved for foreign investors.

Western powers imposed sanctions on Russia and its financial system in response to the country’s invasion of Ukraine. This hampered the ability of his government and businesses to pay their debts.

Many Russian companies, including VTB, have been directly sanctioned by the United States, United Kingdom and European Union. Meanwhile, the US Treasury has told US banks to stop processing dollar bond payments as it seeks to increase economic pressure on Russia.

“As a bank subject to blocking sanctions, completely cut off from the foreign payment infrastructure in US dollars, we cannot make payments in foreign currencies for reasons beyond our control,” said Dmitry Pyanov, member of VTB’s board of directors, according to the state media organization Interfax.

In response to Western sanctions, the Russian government decreed in early March that companies could make payments to domestic holders of foreign currency-denominated bonds in rubles.

He also said companies could send rubles to special accounts at the National Settlement Depository, which would be reserved for foreign investors.

VTB took advantage of this decree, making payments worth $27 million in rubles to national bondholders. He said he sent the remaining $25 million to accounts of residents of “unfriendly” countries.

However, banks in the United States, Europe, and Asia consider paying in rubles on dollar bonds a default. Russian bondholders say sanctions and bond contracts mean they cannot accept rubles under any circumstances.

Last week, a group of creditors ruled that state-owned Russian Railways defaulted after failing to pay its dollar obligations. Russian companies and the government have argued they have the money to pay, but are being forced into artificial defaults.

Tatiana Orlova, emerging markets economist at Oxford Economics, warned last week that “an avalanche of defaults by Russian companies is also about to begin”, after the government was blocked from making 650 million dollars of payments on dollar obligations.

“Russian corporate borrowers linked to oligarchs and sanctioned officials are unable to make payments to foreign bondholders, for the same reason as the sovereign,” she said in a note to clients of the consulting firm.

Last week, Alfa Bank failed to make payments on its dollar bonds, saying in a statement it was technically impossible due to the sanctions. The Russian Agricultural Bank, another lender, also missed a payment last week.

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