WASHINGTON — The Biden administration will block Russia from paying U.S. bondholders, raising the likelihood of Russia’s foreign debt defaulting for the first time in more than a century.
An exemption from the sweeping sanctions imposed by the United States on Russia as punishment for the invasion of Ukraine has allowed Moscow to continue to pay its debts since February. But that ban will expire on Wednesday, and the United States will not renew it, according to a statement released Tuesday by the Treasury Department. As a result, Russia will not be able to make billions of dollars in debt and interest payments on foreign investor bonds.
The move represents an escalation of US sanctions at a time when the war in Ukraine drags on and Russia shows little sign of complacency. Biden’s administration officials had debated extending the so-called general license, which would allow Russia to pay interest on the debt it sold. By extending the waiver, Russia would have continued to exhaust its US dollar reserves and US investors would have continued to receive their guaranteed payments. But officials, who have tried to increase pressure on the Russian economy, ultimately concluded that a Russian default would not have a significant impact on the global economy.
Treasury Secretary Janet L. Yellen hinted at how the Biden administration leaned in at a news conference in Europe last week when she said the exemption was being created to allow for an “orderly transition” so investors could sell securities. It was always meant to be for a limited time, she said. And she noted that 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 is unable to find a legal way to make these payments, and they technically fail to meet their debts, I don’t think that will really make a significant change in Russia’s situation,” Ms Yellen said. “They’re already cut off from global capital markets, and they’re going to stay that way.”
While the economic impact of a Russian default may be minimal, it was an outcome Russia had been trying to avoid and the Biden administration’s move represents an escalation of US sanctions. Russia has already tried unsuccessfully to pay bonds in rubles and has threatened legal action, arguing that it should not be defaulted on its debts if it is not allowed to pay.
“We can only speculate about what worries the Kremlin most about default: the blemish on Putin’s record of economic stewardship, reputational damage, the financial and legal dominoes that default triggers, and so on,” said Tim. Samples, professor of legal studies at the University of Amsterdam. University of Georgia’s Terry College of Business and a public debt expert. “But one thing is pretty clear: Russia was eager to avoid this scenario and was even willing to make payments with precious unsanctioned foreign currency to avoid a major default.”
Sanctions experts estimate that Russia has about $20 billion in outstanding debt not held in rubles. It’s not clear whether the European Union and Britain will follow the lead of the United States, which would put even more pressure on Russia and leave a wider range of investors unpaid, but most recent sanctions have been closely coordinated.
The prospect of a Russian default has already left some major US investors with losses. Pimco, the asset manager, has seen the value of its Russian bond holdings fall by more than $1 billion this year, and pension funds and mutual funds with exposure to emerging market debt have also seen declines.
In the short term, Russia has two payments for foreign currency bonds due on Friday. currency.
Russia owes approximately $71 million in interest on a dollar-denominated bond maturing in 2026. The contract includes a provision to be paid in euros, British pounds and Swiss francs. Russia also owes 26.5 million euros ($28 million) in interest payments on a euro-denominated bond maturing in 2036, which can be repaid in alternative currencies, including the ruble. Both contracts have a grace period of 30 days for payments to reach creditors.
Russia’s finance ministry said on Friday it had sent the money to its paying agent, the National Settlement Depository, a Moscow-based institution a week before the payment was due.
The Ministry of Finance said it had met these debt obligations. But more transactions with international financial institutions are needed before the payments can reach bondholders.
Adam M. Smith, who was a senior sanctions official in the Obama administration’s Treasury Department, said he expected Russia to most likely default sometime in July and likely see a wave of lawsuits from Russia and its investors follow. .
While a default will inflict some psychological damage on Russia, he said, it will also increase borrowing costs for ordinary Russians and hurt foreign investors who were not involved in the Russian invasion of Ukraine.
“The interesting question for me is: what is the policy goal here?” said Mr. Smith. “That’s not quite clear to me.”
Alan Rappeport reported from Washington, and Eshe Nelson from London.
