Russia eyes gas-for-roubles template for foreign Eurobond payments

Highlights:

• Investors would open Russian FX and rouble accounts
• Scheme to be presented before next coupon payment due on June 23 - source
• One investor doubts that scheme would avert default event

Russia is considering paying Eurobond holders by applying the mechanism it uses to process payments for its gas in roubles, though investors said the move would not enable Russia to avoid a historic default on debt.

The scheme, according to the Kremlin and Russia's finance minister, would allow Moscow to pay bondholders while bypassing Western payment infrastructure. It comes days after Washington decided against extending a license that had permitted US creditors to receive bond payments while enabling Russia to dodge default.

That move by the US Treasury pushed Russia a step closer to defaulting on hard currency debt. Foreign Eurobond holders are now awaiting two coupon payments which fell due last week but carry a 30-day grace period. 

Russia says it has cash and is willing to pay, refusing any talk of default. Finance Minister Anton Siluanov said on Monday that Moscow will continue to service its external debts in roubles.

But for foreign Eurobond holders to receive payments in foreign currencies as per Russia's obligations, they would have to open rouble and hard currency accounts at a Russian bank, he told Vedomosti newspaper.

"As happens with paying for gas in roubles: we are credited with foreign currency, here it is exchanged for roubles on behalf of (the gas buyer), and this is how the payment takes place," he said.

"The Eurobond settlement mechanism will operate in the same manner, only in the other direction."

The money would be channelled through Russia's National Settlement Depository (NSD), Siluanov told Vedomosti.

Unlike many Russian financial institutions, the NSD is not under Western sanctions. There will be no limit on rouble conversion into other currencies and the scheme will be reviewed by the government soon, he said.

In a conference call with reporters, Kremlin spokesman Dmitry Peskov endorsed Siluanov's plan but said the finance ministry will consult with bondholders before introducing it.

"There is money, there is a willingness to pay, be that in roubles or under a scheme most convenient for the bondholders. Everything will depend on those contacts," Peskov said.

The finance ministry did not reply to a Reuters request for comment. A financial market source said Russia plans to present the scheme to investors before its next payments, on two bonds, fall due on June 23.

SCEPTICISM

Russia has around $40 billion of international bonds outstanding, on which just under $2 billion of payments are due before year-end. Some of its bonds, issued after 2014, have provisions to be settled at the NSD and in alternative currencies, including roubles.

Bond terms usually stipulate that all creditors are paid, and not doing so can be considered a default. Investors said default looks inevitable now that US creditors have been barred from accepting Russian debt payments.

"It's feasible from the legal point of view as a way to get money to bondholders, but not as a way to avoid an event of default," a Europe-based investor said.

However, investors in the European Union can still receive payments, said Zia Ullah, partner and head of corporate crime and investigations at law firm Eversheds Sutherland, "unless a bank subject to asset freezes is involved in the payments chain".

Some European energy companies have opened rouble accounts at Russia's Gazprombank, after the Kremlin demanded "unfriendly" countries pay for gas in roubles or be cut off. Buyers must deposit euros or dollars into an account at a Russian bank, which converts the cash into roubles. 

The financial market source said it had not been decided which bank would be used for Eurobond payments.

Ullah said Russia would not be able to make payments in dollars as US banks are restricted from clearing such deals.

"Anything dollar-denominated would have to be paid in a different currency ... As long as you were comfortable accepting non-dollar payments, there is nothing to prevent it," he added.

But investors were sceptical, given the stigma attached to dealing with Russia.

"Legally it seems possible, but I don't think people will pick it up," a Europe based bondholder said, calling the payment scheme a "difficult grey area." "The reality is that for a global fund that holds both business in the US and in Europe would be difficult to accept this mechanism."