US halts Russian bond payments, raising default risk

FILE PHOTO: A view shows a Russian one ruble coin and a U.S. one dollar bill in this illustration taken October 26, 2018. REUTERS/Maxim Shemetov/File Photo

NEW YORK/WASHINGTON, April 5 (Reuters) – The United States on Monday prevented the Russian government from paying holders of its sovereign debt more than $600 million from reserves in U.S. banks, in a move aimed at increasing pressure on Moscow and eat in their holdings of dollars.

Under sanctions imposed after Russia invaded Ukraine on February 24, foreign exchange reserves held by the Russian central bank in US financial institutions were frozen.

But the Treasury Department had been allowing the Russian government to use those funds to make coupon payments on dollar-denominated sovereign debt on a case-by-case basis.

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

An $84 million coupon payment on a 2042 dollar sovereign bond was also due Monday.

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

Russia faces a historic default if it decides not to do so.

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

JPMorgan Chase & Co (JPM.N), which until now had been processing payments as a correspondent bank, has been detained by Treasury, a source familiar with the matter said.

The correspondent bank processes Russian coupon payments and sends 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.

DEFAULT CONCERNS

Russia has the means to pay with reserves, as sanctions have frozen roughly half of Russia’s estimated $640 billion in gold and foreign exchange reserves.

But a reduction would add pressure just as the United States and Europe plan new sanctions this week to punish Moscow for the killings of civilians in Ukraine. Read more

Russia calls its actions in Ukraine a “special military operation.” Ukraine and the West say the invasion was illegal and unjustified. Images of a mass grave and the bound bodies of people shot at close range sparked an international outcry on Monday. Read more

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

“Basically what they’re trying to do is force their hand and put even more pressure (to deplete) foreign currency reserves at home,” said David Wolber, sanctions lawyer for Gibson Dunn in Hong Kong.

“If they have to do that, obviously that takes away Russia’s ability to use those dollars for other activities, essentially to finance the war.”

It may also put pressure on Russian demands that European customers pay rubles for gas, he added.

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

If Russia fails to make any of its upcoming bond payments within pre-defined timeframes, or pay in rubles where dollars, euros or another currency is specified, it will constitute a default. Read more

While Russia is unable to access international lending markets due to sanctions, a default would bar it from accessing those markets until creditors have received full payment and all legal cases stemming from the default are resolved. Read more

Reporting by Megan Davies and Alexandra Alper. Additional reporting by Tom Westbrook; edited by Himani Sarkar and Jason Neely

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