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 US sanctions has allowed Russia to continue to pay its debts since February. But that split expires Wednesday, and the United States won’t renew it, according to a statement released Tuesday by the Treasury Department. As a result, Russia will no longer be able to pay interest it owes on billions of dollars in debt from US investors. As a result, Russia will not be able to make billions of dollars in debt and interest payments on foreign investor bonds.
Biden administration officials had debated extending the so-called general license, which would allow Russia to pay interest on the debt they sold, but officials ultimately determined that a Russian default would not significantly affect the global economy and ruled it out. to expire.
Treasury Secretary Janet L. Yellen said at a news conference last week that the exemption was created to allow for an “orderly transition” so investors could sell securities. It was always meant to be for a limited time, she said. She noted that Russia’s ability to borrow is already essentially cut off.
“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 tried to avoid and represents an escalation of US sanctions. Russia has already tried unsuccessfully to make bond payments in rubles and has threatened legal action, arguing it shouldn’t be in default if it’s 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, a professor of legal studies at the University of Georgia’s Terry College of Business and an expert on public debt. “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.”
Russia must make two foreign currency bond payments on Friday, both of which have clauses in their contracts that allow for repayment in other currencies if Russia is unable “for reasons beyond its control” to make payments in the currency originally agreed to.
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 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.
