Russia Pays Dollar-Denominated Debt in Rubles, Risking Default, after U.S. Blocks Payment

Credit rating agencies have indicated that payments in a currency different from the one the debt was sold in would count as a default once the grace period expired.

Russia’s finance ministry said on Wednesday that it had used rubles to pay about $650 million in dollar-denominated debt obligations after the U.S. government blocked access to dollars held in American banks. The move pushed the country closer to a default.

Credit rating agencies have indicated that payments in a currency different from the one the debt was sold in would count as a default once the grace period expired. Russia’s debt payments that were due on Monday have a 30-day grace period and had no provision for repayment in any currency other than dollars. It would be Russia’s first default on foreign currency debt in more than a century.

On Monday, the U.S. Treasury Department tightened its restrictions on Russian financial transactions and said it had blocked Russia from making debt payments using dollars held in American banks. The department said it wanted to force Russia to either deplete the foreign currency reserves it has in the country or spend dollars from new revenue to avoid a default.

Last week, Russia bought back in rubles three-quarters of the bond that matured on Monday, which was worth about $2 billion. But it said $552 million, plus the final interest payment, still needed to be paid. A coupon payment for a different bond was also due on Monday.

Russia had previously warned that if foreign banks didn’t follow its orders to make bond payments because of the sanctions, then the debts would be repaid in rubles. On Wednesday, the finance ministry said that was what had happened “due to the unfriendly actions of the U.S. Treasury.”

Since Russia invaded Ukraine in late February and sanctions were imposed, routine debt payments have been put under a microscope. Russia had avoided default on its foreign currency government bonds by paying the debt in dollars with the approval of the U.S. government. But amid growing calls for President Vladimir V. Putin to face a “war crime trial,” the U.S. tightened its sanctions.

JPMorgan Chase was not given permission by the U.S. authorities to process Monday’s bond payment, according to a person familiar with the situation who spoke on condition of anonymity because of the sensitivity of the situation. It had previously been cleared to handle five other payments after sanctions were imposed last month, the person said.

On Wednesday, Russia said it had transferred the payments to the country’s National Settlement Depository in rubles and considered its obligations fulfilled “in full.” But sanctions make it difficult for Western lenders to access the rubles held in Russian bank accounts. The finance ministry added that if Russia were allowed to access its internationally held foreign exchange reserves, then the rubles could be converted to dollars.