Washington-The Biden administration begins to prevent Russia from paying U.S. bondholders, The first default of Russia’s external debt over a century.
Exemption from the drastic sanctions that the United States has imposed on Russia as a punishment for the invasion of Ukraine has allowed Moscow to continue to repay its debt since February. But that carve-out expired on Wednesday, and the United States has to extend it, Notice issued by the Ministry of Finance on Tuesday.. As a result, Russia will not be able to pay billions of dollars in debt and interest on bonds held by foreign investors.
This move represents the escalation of US sanctions at the moment of a prolonged war in Ukraine. Russia showing no signs of forgiveness.. Biden administration officials were discussing whether to extend what is known as a general license, which allowed Russia to pay interest on the debt it sold. By extending the exemption, Russia would continue to run out of US dollar reserves and US investors would continue to receive guaranteed payments. However, officials seeking to increase pressure on the Russian economy ultimately determined that Russia’s default would not have a significant impact on the global economy.
Treasury Secretary Janet Yellen said at a press conference in Europe last week that an exemption was created to allow an “orderly transition” to allow investors to sell securities. It showed how the administration was leaning. It was always intended for a limited time, she said. And she said Russia’s ability to borrow money from foreign investors has already been essentially cut off by other sanctions imposed by the United States.
“If Russia fails to find a legitimate way to make these payments and is technically in default, I don’t think it will make a big difference to Russia’s situation,” Yellen said. Stated. “They are already separated from the global capital markets and will continue.”
The economic impact of Russia’s defaults may be minimal, but it is a result of Russia’s attempts to avoid it, and the Biden administration’s move represents an escalation of US sanctions. Russia has already failed to try to pay bonds in the ruble, Intimidation to take legal actionClaims that if payment is not allowed, it should not be considered default.
“We can only speculate that the Kremlin is most worried about defaults, such as the dirty records of Putin’s economic stewardship, bad reputation, financial and legal dominoes with defaults in action.” And a sovereign debt expert at Terry Business College at the University of Georgia. “But one thing is clear: Russia was keen to avoid this scenario and was even willing to pay in valuable unlicensed foreign currencies to avoid major defaults. . “
Sanctions experts estimate that Russia has about $ 20 billion worth of outstanding debt that is not held in the ruble. It is not clear whether the European Union and Britain will follow US leadership. US leadership puts more pressure on Russia, leaving a wide range of investors unpaid, but most of the recent sanctions have been tightly coordinated.
Russia’s default outlook is already costing some major US investors. Investment manager Pimco’s bond holdings in Russia have fallen by more than $ 1 billion this year, and pension funds and investment trusts have also fallen under emerging market debt.
In the short term, Russia will have to make two foreign currency bond payments on Friday. Both contracts have provisions that allow repayment in other currencies if Russia is unable to make payments at the amount originally agreed “for reasons out of control”. currency.
Russia is obliged to pay interest of approximately $ 71 million on dollar-denominated bonds maturing in 2026. The contract provides for payments in Euros, British Pounds and Swiss Francs. Russia is also obliged to pay interest of € 26.5 million ($ 28 million) on euro-denominated bonds due in 2036 and can be repaid in alternative currencies, including rubles. Both contracts have a 30-day grace period to pay the creditor.
The Russian Ministry of Finance said on Friday that it had sent the funds to the payment agent, the Moscow-based institution, the National Settlement Vault, one week before the due date.
The Treasury said it had fulfilled these obligations. However, more transactions with international financial institutions are needed before payments reach bondholders.
Adam M. Smith, senior sanctions official at the Obama administration’s Treasury, said Russia is likely to default during July and a wave of litigation from Russia and its investors could continue. He said he expected it to be high.
The default will cause some psychological damage to Russia, but it will also increase the cost of borrowing for ordinary Russians and harm foreign investors who were not involved in Russia’s invasion Ukraine, he said. Said.
“The question that is interesting to me is what is the policy goal here?” Smith said. “It’s not entirely clear to me.”
Alan Rappeport reported from Washington and Eshe Nelson from London.