US Blocks Russian Debt Payments To Increase Pressure

Can sanctions make Russia default? 3:25

New York/Washington (Reuters) — The United States on Monday prevented the Russian government from paying its sovereign debt holders more than $600 million of reserves held in U.S. banks, in a move intended to increase pressure on Moscow already deplete its holdings of dollars.

Under sanctions imposed after Russia invaded Ukraine on February 24, the Russian central bank’s foreign exchange reserves in US financial institutions were frozen. However, the Treasury Department had allowed the Russian government to use those funds to pay coupons on dollar-denominated sovereign debt, on a case-by-case basis.

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On Monday, with the largest of the payments due, including a $552.4 million principal payment on a maturing bond, the US government decided to cut off Moscow’s access to the frozen funds, according to a US Treasury spokesman.

This Monday, a coupon of US$ 84 million of a sovereign bond in dollars of 2042 also expired.

The move was intended to force Moscow to make the difficult decision of whether to use the dollars it has access to for its debt payments or for other purposes, including supporting its war effort, the spokesman said.

Russia faces a historic default if it decides not to.

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“Russia must choose between emptying its remaining valuable dollar reserves or bringing in new revenue, or default,” the spokesman said.

JPMorgan Chase & Co.which had been processing the payments as a correspondent bank until now, was stopped by the Treasury, a source familiar with the matter said.

The correspondent bank processes the coupon payments from Russia, sending them to the paying agent for distribution to overseas bondholders.

The country has a 30-day grace period to make the payment, the source said.

Concern about non-payment

The increased pressure comes as the United States and Europe plan new sanctions this week to punish Moscow for the killing of civilians in Ukraine.

Russia describes its actions in Ukraine as a “special military operation”. Ukraine and the West say the invasion was illegal and unjustified. The images of a mass grave and the bound bodies of the people who were shot at point-blank range sparked an international outcry on Monday.

Russia, which has a total of 15 international bonds outstanding with a face value of about $40 billion, has so far managed to avoid defaulting on its international debt despite unprecedented Western sanctions. But the task is getting more and more difficult.

The last time Russia was allowed to make a payment was for a $447 million coupon on a 2030 dollar sovereign bond, which was due last Thursday, at least the fifth such payment since the war began. .

If Russia does not make any of its upcoming bond payments within their pre-established deadlines, or pay in rubles when dollars, euros or another currency is specified, it will constitute a default.

Although Russia is unable to access international lending markets due to Western sanctions, a default would bar it from accessing those markets until creditors are fully repaid and court cases resulting from the default are resolved.

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