Ukraine war: US stops Russian bond payments in bid to raise pressure on Moscow and a potential default
- Move is designed to force Moscow into choosing three unappealing options, draining dollar reserves held in Russia, spending new revenue, or going into default
- A default would prohibit Moscow from accessing certain markets until creditors are fully repaid and any legal cases stemming from the default are settled
The US Treasury has halted dollar debt payments from Russian government accounts at US banks, increasing pressure on Moscow to find alternative funding sources to pay bond investors.
The move is designed to force Russia into choosing among three unappealing options – draining dollar reserves held in its own country, spending new revenue, or going into default, said a spokesperson for the Treasury’s Office of Foreign Assets Control who discussed details of the decision on condition of anonymity.
The change comes as a payment on the country’s sovereign debt was due on Monday and is intended to further ratchet up pressure on Russian President Vladimir Putin to end his invasion of Ukraine. It follows accusations over the weekend that Russian troops massacred civilians in Bucha and other Ukrainian towns.
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Russian troops accused of war crimes after mass graves found in Bucha near Ukrainian capital
A carve-out in US policies has allowed overseas and US investors so far to receive payments on Russian foreign-currency debt, even as restrictions complicate the process. The exemption is set to expire on May 25.
“It seems to me that it is a U-turn of what the US government allowed on March 17, when Russia paid a US$117 million coupon,” said Carl Wong, head of fixed income at Avenue Asset Management Ltd. in Hong Kong, which does not own any Russian dollar debt.
Despite warnings from credit-rating companies and others, Putin’s government has so far stayed current on its foreign debt obligations – many of which have been relatively small when compared to its full load. A once-$2 billion dollar bond that matured Monday served as the most recent stress test, though Russia was able to buy back about three-quarters of the outstanding amount in roubles before the note came due.
The latest US move will intensify scrutiny on payments due May 27 for interest owed on sovereign dollar and euro notes due in 2026 and 2036, data compiled by Bloomberg show.
Russia’s central bank said last week its foreign-currency and gold reserves plunged to just $604.4 billion as of March 25, the lowest level since last August. It marks a $38.8 billion drop from a February peak, underscoring the drain since Russia began the invasion.
It can still receive payments for oil and gas as sanctions imposed by the US and its allies exclude energy transactions, an exception that is set to hand Putin a $321 billion windfall this year if the commodities continue flowing.
The war prompted sweeping sanctions and handcuffed the central bank after the seizure of an estimated two-thirds of its reserves. Although Governor Elvira Nabiullina has acknowledged that the curbs imposed on the Bank of Russia meant it could not intervene in the market, she’s said it sold foreign currency to support the rouble on Feb. 24, when the invasion began, and the following day.
Ukraine war: Sanctions-hit Russia teeters on brink of historic default
Explaining the decline in reserves since February 18, the central bank cited in a statement: interventions, foreign-exchange refinancing operations and a currency revaluation of assets.
Russia has been working in recent years to remove the dollar’s hold over its economy and financial markets, which means it’s hacked its holdings of US Treasuries and taken dollar assets from its sovereign wealth fund.
If Russia fails to make any of its upcoming bond payments within their predefined time frames, or pays in roubles where dollars, euros or another currency is specified, it will constitute a default.
While Russia is not able to access international borrowing markets due to the West’s sanctions, a default would prohibit it from accessing those markets until creditors are fully repaid and any legal cases stemming from the default are settled.
Additional reporting by Reuters
