The decision further complicates Russia’s attempts to continue to honor its debt obligations despite sanctions imposed after invading Ukraine.
Russia’s efforts to avoid a sovereign default took another hit after the US Treasury halted dollar debt payments from the country’s accounts in US banks.
The decision further complicates Russia’s attempts to continue to honor its debt obligations despite sanctions imposed after invading Ukraine. As the government tries to avoid its first external default in about a century, these restrictions have hampered and delayed the process of moving money to bondholders.
Other governments are also planning tougher penalties after allegations that Russian troops massacred civilians in Bucha and other Ukrainian towns. The European Union is proposing to ban coal imports from Russia, which would be a major step forward for a region that has so far been reluctant to target energy flows crucial to the bloc’s economy.
U.S. announcement aims to force Russia to either dip into domestic dollar reserves, spend new revenue to make bond payments, or default, Office of Foreign Assets Control spokesperson says Treasury, who discussed the details on condition of anonymity. .
“Clearly this latest announcement from the US Treasury is designed to put additional pressure on the Russians,” said Gary Kirk, portfolio manager at TwentyFour Asset Management. “Alternative payment methods are significantly more punitive and difficult for Russia and therefore increase the risk of technical default.”
Despite warnings from credit rating companies and others, Putin’s government has so far stayed on top of its foreign debt obligations.
But the sweeping sanctions have already led to the seizure of around two-thirds of Russian reserves. The central bank says it has also sold off some of its foreign currencies to prop up the rouble, leaving questions over how long it can dip into its local coffers to pay its debts.
Russia’s foreign exchange and gold reserves stood at about $604 billion as of March 25, down $38.8 billion from February’s peak. Yet it reaps huge sums of money from energy exports. Bloomberg Economics expects to earn nearly $321 billion this year if commodities keep flowing.
But even with the funds, payments have not been smooth, with many being delayed by banks carrying out lengthy checks to ensure they are not breaching sanctions.
A $2 billion bond that matured on Monday served as the most recent stress test, although Russia was able to redeem about three-quarters of the outstanding rubles before the note matured. The latest U.S. move will intensify scrutiny of its ability to repay the rest of that debt.
Additionally, coupon payments due Monday on a 2042 bond had yet to reach some investor accounts Tuesday morning in London, according to bondholders who declined to be named because they are not authorized to speak. publicly.
Russian dollar bonds, which were already trading well in troubled territory, fell on Tuesday. 2042 was down 7 points to around 28 cents on the dollar, according to CBBT prices.
The U.S. announcement “increases default risk, not because of lack of money,” said Lutz Roehmeyer, chief investment officer at Berlin-based Capitulum Asset Management. “The new sanction will lead to technical problems with regard to settlement systems, so the question is now open as to how Russia will build the payment lanes.”
(Updates with EU, analyst comment, starting at third paragraph)
–With help from Giulia Morpurgo, Lilian Karunungan, Netty Ismail, Colleen Goko, Libby Cherry, Irene García Pérez and Carolina Wilson.