Moscow is nearing default on its national debt for the first time since the Bolshevik coup more than a century ago after the US today suspended its ability to pay creditors.
The Treasury Department said in a statement it has no plans to renew the license that allowed Russia to continue paying its debtors through American banks, making a Russian default all but inevitable.
Since the first round of sanctions, the Treasury has licensed banks to process all dollar-denominated bond payments from Russia. This window expires at midnight on May 25th.
The US dollar is the global reserve currency and the currency in which most international trade is denominated, giving the US tremendous control and leverage over international finance as US banks are required to process these transactions.
At the same time, the EU has proposed new rules that would make it harder for Russian oligarchs to evade sanctions and pave the way for their assets to be confiscated to fund Ukraine’s reconstruction.
“While Russian aggression on Ukraine continues, it is of the utmost importance that the EU’s restrictive measures are fully implemented and violating these measures must not pay dividends,” the European Commission said in a statement.
Vladimir Putin (pictured) faces the prospect of Russia defaulting for the first time in over a century after the US prevented Russia from paying off its debt through American banks
Putin meets with his cabinet ministers in 2018. Finance Minister Anton Siluanov is directly to his right. Russia faces its first national debt default in over a century
Several rounds of phased sanctions imposed on Russia by Western powers since the February 24 invasion of Ukraine were intended to target Russia’s oligarchs and bring the country’s economy to its knees. An international debt default is only the final blow.
However, economic sanctions are enforced very differently between the US and the 27 EU member states in a regulatory “patchwork” that often allows targets to evade their bite.
“Breaking EU sanctions is a serious crime and must have serious consequences. We need EU-wide rules to establish this,” said EU Vice-President Vera Jourova.
The EU has imposed five waves of sanctions over Russia’s invasion of Ukraine and is currently negotiating the finishing touches to a sixth round that would include a ban on Russian oil imports, further hampering Russia’s ability to pay its debt.
Russia has so far managed to make all of its international debt payments since sanctions were imposed on the country, but it has done so through stakes in dollar-denominated debt with American banks.
That option is now barred after a temporary sanctions waiver expires, and Russia will owe nearly $2 billion to international creditors by the end of the year.
Typical consequences of a default are being locked out of international bond markets, making it very difficult for countries to borrow money, and paying higher interest rates on future borrowing once the defaulting country is “forgiven” by the debt markets, resulting in lower economic output leads for years.
On previous occasions, international assets have been confiscated from countries unable to pay their debts. When Argentina defaulted again in 2014, creditors demanded a naval boat and a presidential plane.
Pictured: European Commission Vice-President for Values and Transparency, Vera Jourova. She has proposed EU-wide rules to make sanctions violations punishable
Russia’s Finance Minister Anton Siluanov reiterated earlier this month that Russia has no intention of defaulting on its nearly $20 billion in government debt it owes to foreign creditors
Russia has bond payments due on May 27 and June 24 totaling about $500 million. The terms of his bonds allow part of them to be paid in currencies other than the dollar, which offers some relief.
“If bondholders don’t get their money when the money is due, Russia will default on a sovereign debt when the money is due,” Jay Auslander of law firm Wilk Auslander told Reuters. “With the waiver gone, there seems to be no way for bondholders to get paid.”
“Western countries are trying in every possible way to force Russia into default,” Finance Minister Anton Siluanov told the state news service TASS last month. He added that Russia will use “other mechanisms” to make payments.
And he reiterated earlier this month that Russia has no intention of defaulting on its nearly $20 billion national debt it owes to foreign creditors.
The Kremlin warned that while it was ready to pay its foreign debts, it would do so in rubles as long as its foreign currency accounts remained frozen.
Siluanov previously said Moscow will take legal action if its payments are blocked.
“We will sue because we have taken all necessary measures to ensure that investors receive their payments,” Siluanov told the pro-Kremlin newspaper Izvestia in April.
“We will submit evidence of our payments to the court to confirm our efforts to pay in rubles, just as we did in foreign currency. It will not be an easy process.’
It’s unclear who Russia would sue, but it’s believed it would be either the Treasury Department or the Biden administration.
Rating agency S&P last month downgraded Russia’s debt to “junk” status, saying its decision was based in part on its belief that sanctions “hamper Russia’s willingness and technical ability to meet the terms of its obligations to foreign creditors.”
Following a call from Kyiv, some EU member states want the proceeds from expropriated assets to help cover the astronomical cost of rebuilding war-ravaged Ukraine.
However, other member states, including Germany, have expressed fears that the measure could breach international and national laws limiting authorities’ powers to seize private property.
The European Commission’s proposals are expected to be discussed by EU heads of state and government in Brussels on Monday.
The draft conclusions for the summit, presented to AFP on Wednesday, said leaders would support “further options that are compatible with international law and are actively being explored, including options aimed at freezing Russian assets.” to be used in support of the reconstruction of Ukraine”.