VTB , Russia's second-biggest bank, has taken a big step toward default by paying holders of its dollarbonds in rubles.- The bank said it has been "completely cut off from foreign payment infrastructure in US dollars," and so had no choice.
VTB, the second-biggest bank in Russia, has taken a major step toward a default after it had to make dollar bond payments in rubles.
The lender was due to pay $52 million of interest payments on dollar-denominated bonds, but said Wednesday that it had instead sent the money in rubles to special accounts marked for foreign investors.
Western powers have placed sanctions on Russia and its financial system in response to the country's invasion of Ukraine. That has stymied the ability of its government and companies to pay their debts.
Many Russian companies, including VTB, have been directly sanctioned by the US, UK and European Union. Meanwhile, the US Treasury has told American banks to stop processing dollar bond payments, as it seeks to ratchet up the economic pressure on Russia.
"We, as a bank subject to blocking sanctions, completely cut off from foreign payment infrastructure in US dollars, cannot make payments in foreign currency for reasons beyond our control," VTB executive board member Dmitry Pyanov said, according to state media organization Interfax.
In response to Western sanctions, Russia's government decreed in early March that companies could make payments to domestic holders of foreign-currency denominated bonds using rubles.
It also said companies could send rubles to special accounts at the National Settlement Depository, which would be earmarked for foreign investors.
VTB took advantage of this decree, making payments worth $27 million in rubles to domestic bondholders. It said it had sent the other $25 million to accounts for residents of "unfriendly" countries.
However, banks in the US, Europe and Asia consider payment in rubles on dollar bonds constitutes a default. Holders of Russian bonds say sanctions and bond contracts mean there is no way they can accept rubles.
Last week, a group of creditors decided that state-owned Russian Railways had defaulted after it failed to make its bond payments in dollars. Russian companies and the government have argued that they have the money to pay, but are being forced into artificial defaults.
Tatiana Orlova, emerging
"Russian corporate borrowers linked to sanctioned oligarchs and officials are unable to make payments to foreign bondholders, for the same reason as the sovereign," she said in a note to the consultancy's clients.
Alfa Bank last week failed to make payments on its dollar bonds, saying in a statement that it was technically impossible due to sanctions. Russian Agricultural Bank, a fellow lender, also missed a payment last week.