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Oil and gas revenues give Russia’s economy $3.4bn cushion

Russia has boosted the fund that cushions its sanctions-hit economy with $3.4bn in additional oil and gas revenues thanks to rising energy prices since the start of its war with Ukraine, as it edges closer to its first debt default since 1998.

Moscow said on Sunday that it would direct an additional Rbs273.4bn ($3.4bn) to its rainy day fund, of which Rbs271.6bn comes from oil and gas revenues it received in the first quarter of this year.

The additional money “will be used, among other things, to implement measures aimed at ensuring economic stability in the context of external sanctions”, the government said. The Russian economy is likely to contract by 10 per cent this year, according to economists’ consensus forecasts.

Despite this, earnings from commodity exports and harsh capital controls have helped Moscow to stabilise its currency and prevent a financial collapse in the face of severe economic sanctions imposed by western countries and their partners.

So far, Russia’s economy has been buoyed by oil and gas revenues and draconian capital controls, which block most foreign traders from exiting their investments.

However, S&P Global Ratings downgraded Russia’s credit status to a “selective default” this weekend after Moscow announced that it would make payments on the latest tranche of its foreign bonds in roubles, when they are due in dollars.

Russia has kept up payments on its dollar bonds since the start of the invasion, confounding many investors’ expectations that western sanctions and Russian currency controls would drive the country to its first foreign currency debt default since 1998.

But last week, Moscow had been due to make an $84mn coupon payment and a $552mn repayment of a maturing bond, for which it offered payment in roubles rather than dollars after American authorities blocked US banks from processing the payment.

Moscow has a 30-day grace period to get the cash to investors before it is in default, but S&P said this was unlikely to happen.

“We currently don’t expect that investors will be able to convert those rouble payments into dollars equivalent to the originally due amounts, or that the government will convert those payments within a 30-day grace period,” S&P said in a note.

“Sanctions on Russia are likely to be further increased in the coming weeks, hampering Russia’s willingness and technical abilities to honour the terms and conditions of its obligations to foreign debt holders,” it added.

The US last week imposed its most severe level of sanctions on Sberbank, Russia’s largest financial institution, and Alfa-Bank, the country’s biggest private bank, preventing the lenders from transacting with any US institutions or individuals. It also prohibited any new US investments in Russia.

The EU also approved a fifth package of sanctions late last week, including an import ban on Russian coal.

A default is considered selective when it affects some international repayments but not others.

Russia has said that any default — should one take place — would be “artificial” since it is able to pay, but if its foreign reserves remain sanctioned it would make the payments in roubles.

Rating agency Fitch warned last month that an attempt to make dollar interest payments in the Russian currency would indicate “that a default or a default-like process has begun”.

Additional reporting by Valentina Romei in London

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