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Russia makes early debt payment dash in bid to swerve default

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LONDON, May 20 (Reuters) - Russia sent funds to pay interest on two of its international bonds on Friday in an attempt to stave off sovereign default ahead of the expiration next week of a key U.S. licence that allows such transfers.

The finance ministry said it channelled $71.25 million to pay coupons on dollar-denominated Eurobonds maturing in 2026 and 26.5 million euros ($28 million) on euro-denominated notes due in 2036 . read more

Russia has faced the prospect of sovereign default since Western capitals imposed sweeping sanctions in the wake of its invasion of Ukraine on Feb. 24 as well as Moscow introducing counter-measures. The country has been all but cut off from the global financial system and has seen roughly half of its $640 billion reserves abroad frozen.

The two payments had only been due in a week's time, but Russia is relying on a licence from the U.S. Treasury to be able to transfer the money to international bond holders - a key part of avoiding a sovereign default.

That licence runs out on May 25.

"They are kicking the can down the road," said Kaan Nazli at asset managers Neuberger Berman, who holds some Russian sovereign bonds.

The country's $40 billion of international bonds, around half of which are held by foreign investors, have emerged as a flashpoint in recent months.

While Russia initially seemed keen to withhold payments to foreign investors unless it was allowed to make use of its frozen reserves abroad, this seems to have changed.

"The strategy turned into Russia not wanting to be the party to blame for the default," said Nazli.

According to the finance ministry, Russia's national settlement depository - which acts as a payment agent on the two bonds - had received the funds.

It was unclear it the depository would be able to channel the funds itself so they could reach foreign holders of Russian Eurobonds.

JPMorgan, which previously acted as a correspondent bank on such payments, and the U.S. Treasury did not immediately respond to a request for comment.

Russian Finance Minister Anton Siluanov said on Wednesday that Moscow would service its external debt obligations in roubles if the United States blocks other options and would not call itself in default as it had the means to pay. read more


Despite the plethora of curbs, Russia has managed to make payments on seven bonds since its invasion of Ukraine before the latest interest payments.

"We are just moving from payment to payment at the moment and then at some point the music will stop," said one portfolio manager on condition of anonymity.

But it seems increasingly unlikely that the U.S. Office of Foreign Assets Control (OFAC) will extend the licence Russia needs to make the payments. Treasury Secretary Janet Yellen said on Wednesday that while no final decision had been taken, it was "unlikely that it would continue." read more

Those in support of an extension argue that allowing Russia to service its debt would drain its war chest by forcing Moscow to use its hard-currency revenues to make payments to creditors.

Opponents say Russia has to pay less than $2 billion on its external debt until the end of the year, which pales compared with Moscow's oil and gas revenue of almost $28 billion in April alone thanks to high energy prices.

The next payments after the May 27 one are $235 million across two Eurobonds due on June 23.

"If OFAC fails to extend the licence, eventually and inevitably Russia will be forced into default," said Tim Ash, at BlueBay Asset Management.

Reporting by Karin Strohecker, additional reporting by Marc Jones and Jorgelina do Rosario in London, Michelle Price in New York, editing by Nick Macfie and Hugh Lawson
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