This decision further complicates Russia’s efforts to continue to meet its debt obligations amid sanctions imposed after its invasion of Ukraine.
Russia’s efforts to avoid sovereign default have dealt another blow after the US Treasury Department halted dollar-denominated debt payments from its accounts at US banks.
This decision further complicates Russia’s efforts to continue to meet its debt obligations amid sanctions imposed after its invasion of Ukraine. As the government tried to avoid its first external default in about a century, those restrictions hampered and delayed the transfer of money to bondholders.
Other governments are also planning tougher sanctions 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 big step forward for a region that has so far avoided targeting energy flows vital to the bloc’s economy.
The US declaration is intended to force Russia to withdraw its domestic dollar reserves or spend its new revenue on bond payments, or else it will fall into default, according to a spokesman for the Office of Foreign Assets Control. of the US Treasury, who discussed the details on condition of anonymity. .
“Clearly this latest announcement from the US Treasury Department is designed to put more pressure on the Russians,” said Gary Kirk, a portfolio manager at TwentyFour Asset Management. “Alternative payment methods are more punitive and more challenging for Russia and therefore increase the likelihood of a technical default.”
Despite warnings from rating agencies and others, Putin’s government has so far stood by its external debt obligations.
But sweeping sanctions have resulted in the seizure of an estimated two-thirds of Russia’s reserves. The central bank said it also sold some of its foreign currency to support the ruble, leaving questions about how long the bank can withdraw from local coffers to repay the debt.
Russia’s foreign currency and gold reserves as of March 25 were about $604 billion, down $38.8 billion from their February peak. However, it is raking in huge sums of money from energy exports. Bloomberg Economics is expected to make nearly $321 billion this year if commodities continue to flow.
But even with the funds, the payments have not been smooth, with many banks experiencing lengthy delays in checks to make sure they weren’t breaching sanctions.
The $2 billion one-time bond that matured on Monday was seen as the most recent stress test, although Russia was able to buy back about three-quarters of the outstanding amount in rubles before the bond due. The latest US move will increase scrutiny of its ability to pay the rest of that debt.
Additionally, coupon payments due Monday for the 2042 bond have yet to reach some investor accounts Tuesday morning in London, according to bondholders who declined to be named because they were not authorized to do so. public speaking.
Russian dollar bonds, which have been trading well in hard-hit territory, fell on Tuesday. According to CBBT valuations, the year 2042 drops 7 points to about 28 cents against the dollar.
The US announcement “increases the risk of default, not because of a lack of funds,” said Lutz Roehmeyer, chief investment officer at Berlin-based Capitulum Asset Management. “The new sanctions will cause technical problems related to the payment system, so it is currently an open question as to how Russia will build payment routes.”
(Update with EU, comment from analyst, starting at third paragraph)
–With support from Giulia Morpurgo, Lilian Karunungan, Netty Ismail, Colleen Goko, Libby Cherry, Irene García Pérez and Carolina Wilson.