Here’s how Russia has avoided defaulting on its debt

Despite strict economic sanctions, shrinking currency reserves and nervous banks, Russia has kept up with payments for government debt, confounding expectations from just a few weeks ago, when the ratings agencies believed a default was imminent and the government said it might repay its international loans in rubles.

“People look at this and are scratching their heads,” said Michael Bolliger, chief investment officer for emerging markets at UBS Global Wealth Management. He said they were asking: “How is this possible? And why” is Russia willing to repay?

Monday had been expected to be a test for Russian debt, with more than $2 billion due to be paid in U.S. dollars. But last week, Russia bought back about three-quarters of the debt in exchange for rubles, a relatively unusual move that shrunk its dollar obligations. That still left $552 million to be paid. The finance ministry hasn’t said if the payment has been made.

Every payment Russia has owed on its dollar-denominated debt since it invaded Ukraine has been scrutinized. The first payments of $117 million in mid-march were slightly delayed after Jpmorgan Chase in New York and Citibank in London sought approvals to handle the transactions, avoiding what would have been Russia’s first default on foreign currency debt in more than a century.

But there is still intense focus on future payments. While Russia has shown a willingness to repay its debt in dollars, analysts have questioned whether sanctions imposed by U.S. and European governments will eventually get in the way of its ability to pay. The U.S. government has created a carve-out from its sanctions policy to allow for debt repayments, but that expires May 25. Two days later, about $100 million in interest payments are due.

Russia also has lost access to about half of its $600 billion in currency and gold reserves because of sanctions on its central bank, but that hasn’t yet impeded the country’s ability or willingness to send foreign currency overseas. For one thing, it is still receiving foreign currency for natural gas exports, and Bolliger said that Russia’s ability to repay its debt is less of an issue, for the time being.

But analysts can only speculate why Russia is willing to repay amid stifling sanctions that are set to get tighter.

“If they have aspirations at some future date of coming back into global capital markets, then it’s better not to have defaulted,” said Kamakshya Trivedi, co-head of global foreign exchange, interest rates and emerging markets strategy at Goldman Sachs.

Sanctions and Russian capital controls are snarling other debt payments. In early March, Russia said that coupon payments for ruble-denominated debt wouldn’t be paid to foreign investors, and although documents on the finance ministry’s website show payments have been made, it’s unclear if foreign investors can access the money.

And then there are companies that haven’t been able to pay their debts on time because their owners are under sanctions. Severstal, the steel giant, ran out of time to resolve an issue raised by Citibank to pay out a $12.6 million coupon on a dollar-denominated bond, for example.

Credit rating agencies in recent weeks have withdrawn their ratings for entities in Russia, in line with European Union sanctions. That will make it much harder for Russian companies to raise capital, Trivedi said.

“Without having credit rating agencies fully engaged, the market you would be able to access would be much, much smaller,” he said.