Finance

In March, the Federal Reserve’s preferred inflation gauge rose 5.2%, and the central bank is starting to raise interest rates, trying to thread the needle between slowing the rise in prices and avoiding a recession.
Irv Blumkin, the CEO and Chairman of Nebraska Furniture Mart, said that the higher prices were starting to chip away at the fundamentals of his business but things are in good shape overall.
Jim Weber, CEO of Brooks Running, said it was tough to raise prices but that he thinks some of the cost pressures would cool soon.

Inflation has been one of the hot topics for markets this year, and rising prices are impacting portfolio companies for Berkshire Hathaway in different ways.
In March, the Federal Reserve’s preferred inflation gauge rose 5.2%, and the central bank is starting to raise interest rates, trying to thread the needle between slowing the rise in prices and avoiding a recession.

Ahead of the Berkshire annual shareholders meeting, executives from several of the conglomerate’s companies told CNBC how inflation is hitting their businesses.
Irv Blumkin, the CEO and chairman of Nebraska Furniture Mart, said that the higher prices were starting to chip away at the fundamentals of his business but things are in good shape overall. Home furnishings was a boom industry during the pandemic, as Americans stuck at home redesigned their living spaces and adjusted to remote work.
“Inflation impacting our business a little bit, and we can see a little slowdown in written business, but it’s coming off such huge numbers from the pandemic. … It’s still at a high level, but you can definitely see a slowdown,” Blumkin said.
Jim Weber, CEO of Brooks Running, said it was tough to raise prices but that he thinks some of the cost pressures would cool soon.
“We don’t have unlimited pricing power, but have taken selective price increases where we think we can. But our whole industry is so competitive. It’s a big market place. … I do believe in the supply chain that costs are going to mediate a bit,” Weber said.

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Related to inflation, Dairy Queen CEO Troy Bader highlighted the tight labor market in particular as a challenge for the restaurant industry.
“It’s the biggest challenge that our franchisees face, and I would say it impacts us in three different fronts: one is our franchisees,” he said. “The other really are our vendors and our distributors.”
Roughly 20% of Dairy Queen’s franchise locations still have closed dining rooms because of staffing issues, Bader said.
“It’s not about wages today. People are paying whatever they need to pay. There just aren’t enough people to really come and work in the industry,” Bader said.
Check out all of the CNBC Berkshire Hathaway annual meeting coverage here.

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CONSIDER THE life of a Treasury bill or bond. Typically once or twice a week, a slew of fresh Treasuries are born. Their first home is usually, briefly, an investment bank’s dealing desk. Those dealers might hold onto a few for themselves, but generally distribute the bulk out to more permanent owners, like the bond portfolios of a mutual fund, a foreign government, a company or the Federal Reserve. A certain slice will swap hands repeatedly—some $700bn or so are traded each business day—but many will stay put for their lifetimes. Their deaths are predetermined: they come of age, or “mature”, as little as one month or as long as 30 years after their birth, at which point they are settled and cease to exist. The Fed (pictured) is the single largest holder of Treasuries—its balance-sheet is where many of those securities have found their permanent home. Thanks to bond-buying schemes put in place to ease monetary conditions during the pandemic, the Fed now holds some $5.8trn-worth of Treasuries, a quarter of the $23.2trn-worth the government has issued (see chart—it also holds some $2.7trn-worth of mortgage-backed securities). Come May 4th, however, it is widely expected that Jerome Powell, the Chairman of the Fed, will start shrinking this behemoth portfolio, a process known as “quantitative tightening” (QT). The reversal could spark a repeat of the temporary, yet troubling breakdowns the world’s most important financial market has suffered in recent years—on a bigger scale. According to the minutes of its March meeting, released in early April, the Fed plans to reduce its balance-sheet not by actively making sales, but by letting bonds that have reached the end of their lives mature without buying a new bill or bond to replace them. By July, if all has gone to plan, the Fed’s portfolio will be shrinking by $95bn per month, split between $60bn of Treasuries and $35bn of mortgage-backed bonds. At that pace the Fed’s balance-sheet will shrivel by more than $1trn over the next year. That is “quite the clip” says Darrell Duffie, of Stanford University.There are two reasons investors and policymakers are watching qt closely. The first is its potentially vast impact on monetary policy. Estimates of the effect of bond-buying on the cost of money vary widely—but any downward pressure on interest rates exerted as the Fed bought up Treasuries is likely to be reversed as its holdings start to ebb. Two-year Treasury yields have already climbed from 0.8% in January 2022 to 2.6% now as investors have come to expect quicker balance-sheet shrinking and faster rate increases. (Many expect the Fed to announce a 50 basis-point rate rise at its next meeting on May 3rd-4th, the first increase of that size since 2000.)It is also possible that qt will cause the Treasury market to malfunction—the second reason for concern. Its smooth running matters well beyond America: Treasury rates are a crucial benchmark for pricing virtually all other financial assets globally. And recent history is not encouraging. A series of episodes, including the “flash rally” of 2014; stress in the repo market—a key money market where Treasuries can be swapped for cash—in September 2019; and the covid-19 shock of March 2020, in which the Treasury market in effect ceased to function for periods of time; have created doubts about how robust the Treasury market is. Each of the episodes had slightly different causes. Regardless of how robust the Treasury market was, there was little that would have stopped the extreme nature of the covid-19 shock from rocking it. The repo crisis was in part the result of some perverse incentives caused by post-crisis regulation that deterred banks from holding Treasuries. But both were exacerbated by a more fundamental issue, a former Fed official says, which is that the Treasury market “has grown out of its waist size”. A combination of financial-crisis stimulus, fiscal deficits under President Trump and pandemic-era splurge have caused the Treasury market to grow nearly fivefold since 2007. At the same time fresh regulation imposed on investment banks, which are the main institutions that intermediate Treasury markets, such as the introduction of the supplemental-leverage ratio, which measures the total size of bank assets relative to the amount of capital they hold, has restricted their ability to facilitate Treasury-market activity. The rule is not very friendly to low-risk activities, such as holding Treasuries. A report released last year by the Group of Thirty, an economics advisory body, warned that “the aggregate amount of capital allocated to market-making by bank-affiliated dealers has not kept pace” with its lightning growth. To combat issues that have cropped up in the past the Fed has taken measures to increase liquidity, such as opening up a “standing facility” for selected intermediaries to swap a Treasury for cash. But few think it is a panacea for dysfunction. Mr Duffie favours replacing the current market structure, which relies on broker-dealers, with a central-clearing system. This would make it easier for market participants to interact directly with one another—for a mutual fund, say, to sell to another without relying on a bank to intermediate the transaction. But the fix would be no match for “the scale of the problem”, says the former Fed official. A more urgent task, he argues, is to loosen the regulatory shackles hampering investment banks from supporting the market. But that is unlikely to happen soon: there is little appetite in Washington for weakening bank regulation. In the absence of an obvious fix, the unknowable fallout from the Fed’s pull-out is adding to the uncertainty created by rising rates, stagflation and geopolitical ructions. Liquidity in the Treasury market is already thinning: the “yield error” captured by the Bloomberg Treasury liquidity index, which measures the difference between the yield a Treasury is traded at and a measure of fair value, is 12% higher than it was in January. It has more than doubled since August 2021. The growing possibility of renewed dysfunction could deter investors from dealing further, making it yet likelier that the market seizes up. The once-placid life of Treasury bills and bonds could get more chaotic for a while. More

Berkshire Hathaway added to its Chevron bet significantly during the first quarter, making the energy stock the conglomerate’s fourth biggest equity holding.
The “Oracle of Omaha’s” Chevron investment was worth $25.9 billion at the end of March, the company’s first-quarter filing Saturday showed, a big jump from its value of $4.5 billion at the end of 2021.

Shares of Chevron have rallied more than 30% this year on the back of surging oil prices, but Berkshire’s position has increased fivefold reflecting Buffett’s buying.

Arrows pointing outwards

Energy has been a standout winner this year with the S&P 500 energy sector up 35% compared to the broader benchmark’s 13% loss year to date.
Many oil and gas companies are also good income generators, offering attractive dividends. The energy sector yields 4.7%, compared to S&P 500′s 1.5% dividend yield. Chevron pays a 3.6% dividend.

Warren Buffett and Becky Quick at the Berkshire Hathaway Annual Shareholder Meeting in Omaha, Nebraska, April 29, 2022.
David A. Grogan | CNBC

Chevron is not the only energy stock Buffett likes. Last month, the investor bought $7 billion worth of Occidental Petroleum’s common shares in additional investments.
“Together with the $10 billion in OXY preferred, Berkshire’s bet on the oil sector is now over $40 billion,” said James Shanahan, a Berkshire analyst at Edward Jones.

Berkshire’s biggest holding was still Apple, worth $159 billion at the end of the first quarter. Bank of America and American Express were the two other big holdings, worth $42.6 billion and $28.4 billion, respectively.
The significant Chevron bet might indicate that Berkshire will not acquire Occidental despite the recent jump in the ownership.
“It says that energy is the most attractive place in the market to Warren and that he won’t take OXY private,” said Cole Smead, president and a portfolio manager at Smead Capital Management.
Buffett first bought Chevron in the third quarter of 2020. Based on the stock price moves in April, Chevron may have moved into the third biggest position above American Express depending on whether Buffett bought or sold any shares during the month.
Check out all of the CNBC Berkshire Hathaway annual meeting coverage here.

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The company’s net earnings came in at $5.46 billion, down more than 53% from $11.71 billion in the year-earlier period.
Berkshire’s operating earnings were flat year over year at $7.04 billion. This comes amid a sharp drop in the company’s insurance underwriting business.
The flat operating results were impacted by the slowing U.S. economy, which contracted in the first quarter for the first time since the onset of the Covid-19 pandemic.

Warren Buffett
Gerry Miller | CNBC

Warren Buffett’s Berkshire Hathaway reported Saturday a decline in first-quarter earnings, as the conglomerate was not immune to a slowing U.S. economy.
The company’s net earnings came in at $5.46 billion, down more than 53% from $11.71 billion in the year-earlier period.

Berkshire’s operating earnings — which encompass profits made from the myriad of businesses owned by the conglomerate like insurance, railroads and utilities — were flat year over year at $7.04 billion. This comes amid a sharp drop in the company’s insurance underwriting business; earnings from the segment dropped nearly 94% to $47 million from $764 million in the year-earlier period.
Earnings from Berkshire’s manufacturing, service and retailing segment jumped 15.5% to $3.03 billion in the quarter, while railroad and utilities earnings increased slightly.
Those operating results came as the U.S. economy contracted in the first quarter for the first time since the onset of the Covid-19 pandemic.
The company also took a big hit from its investments, reporting a loss of $1.58 billion amid a broader market decline. To be sure, Buffett always advises shareholders to ignore these quarterly investment fluctuations.
“The amount of investment gains (losses) in any given quarter is usually meaningless and delivers figures for net earnings per share that can be extremely misleading to investors who have little or no knowledge of accounting rules,” Berkshire said in Saturday’s release.

Berkshire’s stock buybacks also slowed down to $3.2 billion from $6.9 billion in the fourth quarter of 2021, as the company was more active with dealmaking last quarter than it had been for a long time.
In late March, the company said it agreed to buy insurer Alleghany for $11.6 billion — marking Buffett’s biggest deal since 2016. Berkshire also unveiled a stake in oil giant Occidental Petroleum that’s now worth more than $7 billion, along with a position in HP Inc that’ now valued at more than $4.5 billion.
Despite the tough environment, Berkshire as an investment has been stellar this year. The conglomerate’s Class A stock is up more than 7% for the year — outperforming the S&P 500, which is down 13.3% for 2022. While down from the fourth quarter, the company still showed a massive cash hoard of $106.3 billion as of the end of the first quarter.

Arrows pointing outwards

The company’s latest quarterly figures come as thousands flocked to Omaha, Nebraska for Berkshire’s annual meeting, where Buffett and Vice Chairman Charlie Munger will take questions from shareholders. (CNBC will host the exclusive livestream on Saturday starting at 9:45 a.m. ET.)
Some of the topics Berkshire shareholders will want the pair to discuss include their market outlook — given the recent inflationary pressures and rising rates — as well as more clarity on the company’s succession plan.
Check out all of the CNBC Berkshire Hathaway annual meeting coverage here. More

Berkshire Hathaway Annual Shareholder Meeting signage in Omaha, Nebraska, April 29, 2022.
David A. Grogan | CNBC

Berkshire Hathaway shareholder meeting’s pregame is nothing short of an extravaganza.
Thousands of Berkshire shareholders flocked to Omaha, Nebraska, this weekend for the annual meeting Saturday. Before hearing from Warren Buffett and Charlie Munger, investors gathered in a sprawling convention center to explore exhibits featuring the conglomerate’s holdings — from toy trains mimicking BNSF Railway rolling stock, Berkshire chocolate coins from See’s Candies to Buffett-branded Brooks athleisure.

The so-called “Berkshire Bazaar of Bargains” is a tradition at the Oracle of Omaha’s annual event. Only those with a shareholder credential can participate and they can shop at a discount in the CHI Health Center.
CNBC will host the exclusive livestream of the shareholder meeting on Saturday starting at 9:45 am ET.

See’s Candies

A display showing chocolate coins at the Berkshire Hathaway Annual Shareholder Meeting in Omaha, Nebraska.
Yun Li | CNBC

The sweets at See’s Candies attracted a big crowd at the “Woodstock for Capitalist.” Two hits of the day were Berkshire chocolate coins and Buffett’s favorite: chocolate walnut fudge.

The Bookworm

Display for an Almanac by Charles Munger, at the Berkshire Hathaway Annual Shareholder’s Meeting in Omaha, Nebraska.
Yun Li | CNBC

“Poor Charlie’s Almanack” (the third edition of Munger’s advice book) was for sale at The Bookworm, a bookstore chain owned by Berkshire. Admirers can also buy a collection of Berkshire Hathaway letters to shareholders from 1965 to 2014.

Check out the gecko

Display showing Gecko character for GEICO Insurance during the Berkshire Hathaway Annual Shareholder Meeting in Omaha, Nebraska.
Yun Li | CNBC

The Geico gecko advertising icon was present to entertain shareholders. Buffett first bought shares of the auto insurer in 1996.

Buffett sneakers & socks

Display for Brooks showing Warren Buffett at the Berkshire Hathaway Annual Shareholder Meeting in Omaha, Nebraska.
Yun Li | CNBC

Shoppers snagged Buffett-branded sneakers, T-shirts and socks at Brooks’ booth. The sportswear company is also co-hosting a 5K run with Berkshire in downtown Omaha on Sunday morning.

Jimmy Buffett’s party boat

A motor boat display at the Berkshire Hathaway Annual Shareholder’s Meeting in Omaha, Nebraska.
Yun Li | CNBC

Shareholders could buy a boat designed by singer Jimmy Buffett at the event for nearly $200,000 at a 10% discount. The boats, manufactured by Berkshire subsidiary Forest River, are in production after 14 months of developing with the 75-year-old Buffett.

BNSF Railway model

A display for the BNSF Railway at the Berkshire Hathaway Annual Shareholder Meeting in Omaha, Nebraska.
Yun Li | CNBC

Toy trains mimicked Berkshire’s BNSF Railway rolling stock. BNSF is one of the largest freight railroads in North America.

Duracell

A display for Duracell at the Berkshire Hathaway Annual Shareholder Meeting in Omaha, Nebraska.
Yun Li | CNBC

Shareholders were lining up to get in battery maker Duracell’s truck with a Buffett mannequin in the driver’s seat. Berkshire closed its deal to buy Duracell from Procter & Gamble in February 2016.

Pampered chef

A display Showing Warren Buffett at the Berkshire Hathaway Annual Shareholder Meeting in Omaha, Nebraska.
Yun Li | CNBC

A cardboard cutout of Buffett in an apron welcomed shareholders at kitchen tools company Pampered Chef.

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This year’s Berkshire annual meeting, dubbed “Woodstock for Capitalists,” will return with shareholders in person in Omaha, Nebraska for the first time since 2019
CNBC will host the exclusive livestream on Saturday starting at 9:45am ET.
Warren Buffett is set to kick off the meeting riding high, with the “Oracle of Omaha” finally back in the deal-making game and the conglomerate’s outperforming stock crossing a key milestone.

Warren Buffett is set to kick off Berkshire Hathaway’s annual shareholder meeting Saturday on a high note, with the “Oracle of Omaha” finally back in the deal-making game and the conglomerate’s outperforming stock crossing a key milestone.
With tens of thousands of shareholders in attendance, this year’s “Woodstock for Capitalists” will return in person in Omaha, Nebraska for the first time since 2019 following Covid-19 disruptions. (CNBC will host the exclusive livestream on Saturday starting at 9:45am ET.)

Investors around the globe are waiting to hear from the 91-year-old chairman and CEO, along with his right-hand man Charlie Munger at 98, following a flurry of investment activities — stakes in Occidental Petroleum and HP as well as an acquisition of Alleghany. Not only featuring hours of commentary from the legendary duo, this renowned event will also include exhibits of Berkshire’s wide range of holding companies — from ice cream maker Dairy Queen to insurer Geico and battery maker Duracell.

Warren Buffett at Berkshire Hathaway’s annual meeting in Los Angeles California. May 1, 2021.
Gerard Miller | CNBC

“This meeting is for people who are diehard value investors, diehard Buffett and Munger fans like I am,” said Whitney Tilson, CEO of Empire Financial Research who has been going to Berkshire’s shareholder meeting for 25 consecutive years. “It’s an opportunity to learn from the masters. It’s just intellectually, psychically and emotionally fulfilling.”
Here are some of the big topics shareholders will want to hear from Buffett:

Market outlook: The stock market has suffered a correction on fears of inflation and rising rates. How should investors navigate the volatility and a tricky economic landscape?
Deploying more cash: Buffett has been putting capital to work as of late. Will his buying spree continue? Is he going to pull off an “elephant-sized” deal?
A slowdown in buybacks: With Berkshire shares significantly outperforming, will Buffett cease or slow down his aggressive buyback program?
Life after Buffett and Munger: Berkshire’s succession plan
China, crypto, Russia’s invasion of Ukraine and more

Looking for market guidance

Berkshire shares are riding high in a volatile market. Class A shares achieved a key milestone last month, topping half a million dollars for the first time as investors embraced the safety of the diversified conglomerate during geopolitical turmoil and surging inflation. The stock is up more than 10% this year, compared to a 10% loss for the S&P 500.

Arrows pointing outwards

In 2020’s annual meeting during the depth of the pandemic, Buffett offered a much-needed reassurance to investors, saying the U.S. economy will withstand this emergency as it has with all of the previous battles and crises.

“Nothing can basically stop America,” Buffett said. “The American miracle, the American magic has always prevailed, and it will do so again. … In World War II, I was convinced of this … I was convinced of this during the Cuban Missile Crisis, 9/11, the financial crisis.”
The macroenvironment has grown increasingly difficult for investors this year as the Federal Reserve rushes to tame down 40-year-high inflation with aggressive tightening. Meanwhile, fears of a recession have crept in after a so-called yield-curve inversion and weak prints in economic data. Not to mention that the U.S. is still not out of woods with the pandemic.
“A lot of people have taken hits in their portfolio outside of Berkshire Hathaway, which has done spectacularly. I think there’s probably more nervousness out there,” Tilson said. “People are looking for wisdom and guidance in a very strange market where there is a war going on and inflation is raging.”
Before the recent buying spree, Buffett had been a net seller of stocks for the past five quarters as he saw few bargains among surging equities.

Arrows pointing outwards

Buyback slowdown

A big driver for Berkshire’s outperformance over the past year has been its aggressive buybacks. The company repurchased a record $27 billion worth of its own shares last year.
“One might expect buybacks to slow down simply because the price of Berkshire has gone up,” said David Kass, a finance professor at the University of Maryland and a Berkshire shareholder. “Buffett will only buy back shares if he considers them to be at a sufficient discount from intrinsic value.”
There was evidence that a reduction has already started. Berkshire used $6.9 billion to buy back shares in the fourth quarter, slower than the $7.6 billion repurchased in the third quarter. Buffett’s annual letter revealed that the conglomerate bought back $1.2 billion of its own stock through Feb. 23.

A major investment?

Berkshire’s investments lately only made a small dent in his $140 billion-pus war chest, leaving Buffett watchers wonder if a major investment is on the horizon.

Arrows pointing outwards

“The recent declines in the stock market resulting from the anticipated tightening of monetary policy by the Federal Reserve may provide additional attractive opportunities for Buffett in the near future,” Kass said.
In March, Berkshire agreed to buy insurance company Alleghany for $11.6 billion in cash. This transaction will mark Berkshire’s biggest acquisition in six years when it bought industrial company Precision Castparts for $37 billion, including debt.
Still, Buffett has yet to make the “elephant-sized acquisition” he’s been touting for years. The investor previously blamed an expensive market for his inaction.

Succession

Vice Chairman of Non-Insurance Operations Greg Abel has been a top contender for Buffett’s successor for years, and a comment by Munger last year caught some attention of investors.
In a discussion about Berkshire’s future, Munger appeared to unintentionally reveal who might have been designated to eventually replace Buffett as CEO.
“Greg will keep the culture,” Munger said at the 2021 annual meeting.
Investors will look for any formal announcement on the succession front Saturday.

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A contractor working for Amazon.com cleans a delivery truck in Richmond, California, U.S., on Tuesday, Oct. 13, 2020.
David Paul Morris | Bloomberg | Getty Images

Check out the companies making headlines in midday trading.
Amazon — Shares of the e-commerce company slumped 14% after issuing weak revenue guidance for the current quarter. Amazon also shared a $7.6 billion loss on its investment in electric vehicle maker Rivian, which lost more than half of its value in the previous quarter.

Verisign — Shares of Verisign lost 14.2% after the Internet infrastructure company reported first quarter earnings of $1.43 per share, which was below analysts’ estimates of $1.50 per share, according to FactSet. Following the results, Baird downgraded the stock to neutral from outperform.
Honeywell — Honeywell’s stock price rose 1.8% after the aerospace products company topped analysts’ expectations. The company posted earnings of $1.91 per share on revenues of $8.38 billion. In comparison, analysts expected earnings of $1.86 earnings per share on revenues of $8.29 billion, according to Refinitiv.
Mohawk Industries — The flooring company’s shares jumped 7.8% following Mohawk’s quarterly results. Mohawk topped revenue estimates of $2.85 billion, according to FactSet, posting $3.02 billion for the quarter.
AbbVie — Shares of the biopharmaceutical company plummeted 6% after AbbVie lowered its full year guidance. AbbVie reported earnings of $3.16 per share, surpassing FactSet consensus estimates of $3.14 earnings per share. However, the company reported a wide revenue miss with revenues of $13.54 billion, compared to consensus estimates of $13.66 billion from FactSet.
Charter Communications — The telecommunications company saw shares fall 7.1% after it reported adjusted EBITDA of $5.21 per share for the first quarter, which slightly missed estimates of $5.26 per share, according to FactSet. Revenue of $13.20 billion also slightly missed estimates of $13.21 billion, according to FactSet.

Intel — Intel’s stock price tumbled 6.9% after the semiconductor company issued weaker-than-expected guidance for its fiscal second quarter. The company reported earnings that otherwise surpassed expectations.
Colgate-Palmolive — Shares for Colgate-Palmolive dropped 5.1% even after the consumer products giant reported earnings. The company earned 74 cents per share, the same as expectations from analysts polled by Refinitiv. Revenues came in at $4.4 billion, in line with consensus expectations from Refinitiv. Colgate-Palmolive also said it expects a decline in gross profit margin for the 2022 fiscal year.
Roku — Roku’s stock gained 1.3% after the company beat revenue estimates. The company posted revenue of $733.7 million, compared to analysts’ expectations of $718.1 million, according to FactSet. The digital media player manufacturer also issued weak revenue guidance for the second quarter.
Tesla — Shares dipped slightly after CEO Elon Musk sold roughly $8.4 billion of Tesla’s stock following his bid to take Twitter private.
 — CNBC’s Samantha Subin contributed reporting

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The funds have reportedly been channeled to the London branch of Citibank but it’s unclear whether they will reach their intended recipients.
The payments were due to be made in April and had entered a 30-day grace period before official default on May 4.

Russia faces renewed threat of debt default on May 4, according to major ratings agencies, as the grace period comes to a close after it attempted to service its dollar bond payments in Russian rubles.
Mikhail Tereshchenko | Sputnik | via Reuters

Russia looks to have averted a historic sovereign default on Friday by tapping its domestic reserves and attempting to make overdue dollar payments on its international debt obligations.
Earlier Friday, Russia’s Finance Ministry said that it had attempted the dollar payments — a dramatic U-turn after the country had previously sought to make the payments on its dollar-denominated bonds in Russian rubles.

The ministry said it had made a payment of $564.8 million on a 2022 eurobond and a payment of $84.4 million on a 2042 eurobond, according to Reuters, with both in dollars — which was originally stipulated in the debt agreements.
The funds have reportedly been channeled to the London branch of Citibank but it’s unclear whether they will reach their intended recipients. The payments were due to be made in April and had entered a 30-day grace period before official default on May 4.
Russian government bonds rallied Friday afternoon following the news from the Finance Ministry. But close Moscow watchers like Timothy Ash, emerging markets strategist at BlueBay Asset Management, were unsure whether it would still be able to avoid a default.
“CDS committee [credit derivatives determinations committee] already ruled default so this is pretty extraordinary … bonds rallying hard … insane,” he said in a flash note Friday afternoon.
A senior U.S. official said later Friday that Russia had not mobilized money through the U.S. system and the payments involved fresh funds.

“The main concern was are they going to use funds that were immobilized in the U.S. or use the money they have been using to prop up the ruble and the war effort. It appears it came from that pile of money because we didn’t authorize any transactions involving the immobilized funds in the U.S.,” the official said, according to Reuters.
A spokesperson for the U.S. Treasury Department’s Office of Foreign Assets Control, or OFAC, was not immediately available for comment when contacted by CNBC.

Assets frozen

Around half of Russia’s vast foreign currency reserves have been frozen by punitive economic sanctions imposed by international powers in the wake of its invasion of Ukraine.
On April 4, Russia made a payment on the two sovereign bonds that are due to mature in 2022 and 2042 in the local currency rather than in dollars as mandated under the terms of its contract.
In a recent statement, ratings agency Moody’s said this deviation from the payment terms relative to the original bond contracts may be considered a default if not remedied by the end of the monthlong grace period on May 4.
“The bond contracts have no provision for repayment in any other currency other than dollars. Although eurobonds issued after 2018 allow under certain conditions for repayments to be made in rubles, those issued before 2018 (including the 2022 and 2042 bonds) either do not contain this alternative currency clause or allow for repayments to be made only in other hard currencies (dollar, euro, pound sterling or Swiss franc),” analysts from the sovereign risk group at Moody’s said.

The ratings agency said it did not believe investors obtained the foreign currency contractual promise on the due date for the payment.
S&P Global Ratings also downgraded Russia’s foreign debt credit rating to selective default after its April 4 ruble payment.
The attempt to pay in rubles came after the U.S. Treasury Department refused in early April a waiver for Russian payments to foreign bondholders to go through despite U.S. sanctions, a special permission it had granted in March.
The move prevented the Kremlin from paying holders of its sovereign debt with the more than $600 million of dollar reserves held with U.S. financial institutions. The aim was to force Russia to either use up more of its own stockpile of dollar reserves or accept its first foreign debt default in more than a century.
While sanctions imposed following Russia’s invasion of Ukraine had already frozen the Central Bank of Russia’s foreign currency reserves held with U.S. banks, the Treasury had allowed Moscow to use those funds on a case-by-case basis to meet coupon payment obligations on its dollar-denominated debt.

Historic default

Russia appeared to have averted a historic bond default in March, fulfilling interest payments worth $117 million on two dollar-denominated sovereign eurobonds after speculation that it may have attempted to pay in rubles.

Kremlin spokesperson Dmitry Peskov said at the time that any default would have been “purely artificial” because Russia had the funds necessary to fulfill its external debt obligations, but would be prevented from doing so by Western sanctions.
Default on Wednesday would be Moscow’s first on its foreign debt since the 1917 Bolshevik Revolution, and could trigger a messy period of legal squabbles.
Russian Finance Minister Anton Siluanov told the pro-Kremlin Izvestia newspaper last month that Russia will take legal action if forced into default by sanctions.

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