The US Treasury said it would halt Russia’s ability to make debt payments in dollars through American banks, bringing Moscow a step closer to a possible default on its obligations to international investors.
The move by US authorities threatens to bring an end to a period since the invasion of Ukraine nearly six weeks ago in which Moscow has kept up payments on its dollar bonds, confounding many investors’ expectations that western sanctions and Russian currency controls would drive the country into its first sovereign default since 1998.
“The US Treasury will not permit any dollar debt payments to be made from Russian government accounts at US financial institutions. Russia must choose between draining remaining valuable dollar reserves or new revenue coming in, or default,” a US Treasury spokesperson said late on Monday.
Russian dollar bond prices, which had rebounded somewhat from their post-invasion slump, fell on Tuesday. A bond maturing in 2028 traded at a price of 34 cents on the dollar, down from 42 cents on Monday.
Although the Treasury has apparently left the door open to continuing payment using dollars not frozen by sanctions, investors said they thought it would be “technically difficult” to get the cash to western bondholders.
JPMorgan, the US correspondent bank which has processed five coupon payments on Russian foreign-currency bonds since Moscow’s invasion of Ukraine, declined to process two further payments due on Monday after seeking guidance from US authorities, a person familiar with the matter said.
Moscow had been due to make an $84mn coupon payment and a $552mn repayment of a maturing bond, and has a 30-day grace period to get the cash to investors before it is in default.
It is “difficult to see how the [Russian finance ministry] can make payments to US bondholders in dollars as per the original documentation given that the US banks are the settlement/clearing agent, and hard to see Russia technically being able to get the dollars into the system to facilitate payment”, said Timothy Ash, an economist at BlueBay Asset Management.
JPMorgan declined to comment.
The move comes as the US and western allies are looking for new ways to toughen their sanctions on Moscow in the wake of its continued war against Ukraine and increasingly brutal military tactics.
The US and its allies imposed a series of harsh economic sanctions on Russia in late February but are trying to find ways to beef them up even more and prevent Russia from circumventing them.
“Russia is facing a recession, skyrocketing inflation, shortages in essential goods, and a currency that no longer works in much of the world,” the US Treasury spokesperson said. “This will further deplete the resources [Russian president Vladimir] Putin is using to continue his war against Ukraine and will cause more uncertainty and challenges for their financial system.”
Even if Russia can avoid default by finding a way to make the payments due on Monday, it faces a further hurdle to servicing its debts after May 25 when an exemption in US sanctions that allows US investors to receive Russian interest payments is due to expire.