June 8, 2022: -Russia explores a unique way of avoiding U.S. sanctions preventing Moscow from servicing its dollar-denominated bond expenses to foreign investors.

The country was revealed to have a historic debt default after the U.S. Treasury Department on May 25 let a critical sanctions exemption expire. The waiver had permitted Russia to process payments to foreign bondholders in dollars through the U.S. and international banks, thereby avoiding default.

On Friday, the Russian Finance Ministry wired $100 million in interest payments on two Eurobonds in rubles to its domestic settlement house. Still, unless the money finds its way to the bank accounts of overseas bondholders, it may include a default.

The payments carry a 30-day grace period. Russia could have defaulted on its foreign currency debt for the first time since the Bolshevik Revolution in 1917, despite the Kremlin claiming to have ample cash to pay for an unprecedented situation for a major economy.

According to the contracts, an additional $2 billion in payments is due before the end of the year. However, some of the bonds issued after 2014 are permitted to be paid in rubles or other alternative currencies.

On Monday, Russian Finance Minister Anton Siluanov reportedly told Russian newspaper Vedomosti that Moscow would continue to service external debts in rubles. Still, foreign Eurobond holders will need to open ruble and hard currency accounts with Russian banks to receive payments.

“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, according to a Reuters translation.

The settlement mechanism would operate in the same fashion but in the opposite direction and would be channeled through Russia’s National Settlement Depository, Siluanov suggested. The NSD, unlike other major Russian financial institutions, is not currently subject to U.S. sanctions.

Nevertheless, the European Union imposed sanctions on the NSD, which was meant to process the bond payments, further complicating matters for Russia.