(Bloomberg) — The U.S. Treasury has halted dollar debt payments from Russian government accounts in U.S. banks, increasing pressure on Moscow to find alternative sources of financing to pay bond investors and avoid a breach.
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The decision adds another complication to Russia’s attempts to continue meeting its debt obligations amid sanctions imposed after the invasion of Ukraine. While the government is so far making payments, some have been delayed as banks have made lengthy checks that they are not breaching any restrictions.
The latest move follows allegations that Russian troops massacred civilians in Bucha and other Ukrainian cities, news that shocked the world and pushed governments to consider a tougher response. European countries will discuss the possibility of extending sanctions to Russia’s oil and coal sectors.
The European Union has so far avoided restrictions that would affect energy flows to the region. But member states are divided on the issue, as oil and gas payments are helping Russia finance its war. Energy exports will give President Vladimir Putin a $321 billion windfall this year if raw materials continue to flow.
The US announcement is intended to force Russia to deplete its domestic dollar reserves or spend new revenue to make bond payments, or default, according to a spokesperson for the Treasury’s Office of Foreign Assets Control, who discussed the details on condition of anonymity. .
This “increases the risk of default, not because of a lack of money,” said Lutz Roehmeyer, chief investment officer at Berlin-based Capitulum Asset Management. “The new sanction will cause technical problems regarding the settlement systems, so it is now an open question how Russia will build the payment routes.”
debt monitoring
Despite warnings from credit rating firms and others, the Putin government has so far kept up with its foreign debt obligations.
A $2 billion bond due Monday served as the latest stress test, though Russia was able to buy back about three-quarters of the outstanding amount in rubles before the note matured.
However, the latest US move will intensify scrutiny over its ability to pay off the rest of that debt. That payment, plus a coupon on a 2042 bond also due Monday, has yet to receive Treasury clearance to be processed by correspondent bank JPMorgan, Reuters reported on Tuesday.
Coupon payments for the 2042 bond have yet to reach some investor accounts as of Tuesday morning in London, according to the bondholders who declined to be identified because they are not authorized to speak publicly.
Russia’s dollar bonds, already trading in distressed territory, fell on Tuesday. The 2042 was down 7 points to around 28 cents on the dollar, according to CBBT prices.
The US action also sharpens the focus on payments due May 27 for interest due in sovereign dollars and euro notes due 2026 and 2036. They come two days after previously announced waivers expire on May 27. 25 of May.
That exclusion has so far allowed US and foreign investors to receive Russian debt payments in foreign currency, even as restrictions complicate the process.
‘More challenging’
Richard Briggs, money manager at GAM Holdings in London, said the latest move makes sovereign payments “more challenging” but the exemption means they are still possible.
“That said, it’s moving fast, and they could change those restrictions and effectively force a default sooner,” he added.
Russia had foreign currency and gold reserves of about $604 billion as of March 25. Still, that’s the lowest since August and is $38.8 billion lower than the February high, underscoring the drain since Russia began the invasion.
Russia has been working in recent years to remove the dollar’s stranglehold on its economy and financial markets, which means it has hacked into its US Treasury bond holdings and taken dollar assets from its wealth fund. sovereign
(Updates with the EU, comment from the analyst, from the third paragraph)
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