Moscow is edging closer to defaulting on its national debt for the first time since the Bolshevik coup more than a century ago after the US cut off its ability to pay creditors today.
The Treasury Department said in a notification that it does not plan to renew the license that allowed Russia to keep paying its debtholders through American banks, making a Russian default all but inevitable.
Since the first rounds of sanctions, the Treasury Department has given banks a license to process any dollar-denominated bond payments from Russia. That window expires at midnight of May 25.
The US dollar is the global reserve currency and the currency in which most international trades are denominated, giving the US enormous control and leverage over international finance as US banks must process those transactions.
At the same time, the EU has proposed new rules that would make it harder for Russian oligarchs to evade sanctions and open the way to confiscating their assets to help pay to rebuild Ukraine.
‘While the Russian aggression on Ukraine is ongoing, it is paramount that EU restrictive measures are fully implemented and the violation of those measures must not be allowed to pay off,’ the European Commission said in a statement.
Vladimir Putin (pictured) is facing the prospect of Russia’s first sovereign debt default in over a century after the US cuts off Russia’s ability to pay its debts through American banks
Putin meets with his cabinet ministers in 2018. Finance Minister Anton Siluanov is immediately to his right. Russia is facing its first sovereign debt default in over a century
Several rounds of incremental sanctions placed on Russia by Western powers since the Feb 24 invasion of Ukraine have been intended to target Russia’s oligarchs and bring the the country’s economy to its knees. An international debt default just the latest blow.
However, economic sanctions are enforced very differently between the US and among the EU’s 27 member states in a regulatory ‘patchwork’ that often enables those targeted to evade their bite.
‘The violation of EU sanctions is a serious crime and must come with serious consequences. We need EU-wide rules to establish that,’ said EU vice president Vera Jourova.
The EU has unleashed five waves of sanctions over Russia’s invasion of Ukraine and is currently negotiating the final touches on a sixth round that would include a ban on Russian oil imports that would further hinder Russia’s ability to pay its debts.
Russia has so far managed to make all its international debt payments since sanctions were placed on the country, but it has done so through holdings in American banks on debt denominated in dollars.
That option is now closed off after a temporary sanctions exemption expired and Russia will owe international creditors nearly $2 billion by the end of the year.
Typical consequences for a default include being excluded from international bond markets, making it very hard for countries to borrow money, and having to pay higher interest rates on future borrowing once the offending country is ‘forgiven’ by debt markets, leading to lowered economic output for years.
On previous occasions, countries unable to pay their debts have had their international assets seized. When Argentina once again defaulted in 2014, creditors claimed a navy boat and a presidential plane.
Pictured: European Commission Vice-President in charge of Values and Transparency Vera Jourova. She has proposed EU-wide rules to make sanctions violations a criminal offence
Russia’s Finance Minister Anton Siluanov reiterated earlier this month that Russia had no intention to default on its nearly $20 billion of sovereign debt it owes to foreign creditors
Russia has bond payments due on May 27 and June 24 that are collectively worth about $500 million. The terms of its bonds allow a portion of that to be paid in currencies other than the dollar, offering some relief.
‘If the bondholders don’t get their money when the money is due, factoring in any grace periods that apply, Russia will be in default on a sovereign debt,’ Jay Auslander of the 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 make Russia declare default,’ Finance Minister Anton Siluanov told state news service Tass last month. He added that Russia would use ‘other mechanisms’ to make payments.
And he reiterated earlier this month that Russia had no intention to default on its nearly $20 billion of sovereign debt it owes to foreign creditors.
The Kremlin warned that while it is willing to pay its foreign debts, it would do so in roubles so long as its overseas accounts in foreign currencies remain frozen.
Siluanov previously said that Moscow will take legal action if its payments are blocked.
‘We will sue, because we undertook all necessary action so that investors would receive their payments,’ Siluanov told the pro-Kremlin Izvestia newspaper in April.
‘We will show the court proof of our payments, to confirm our efforts to pay in rubles, just as we did in foreign currency. It won’t be a simple process.’
It is unclear whom Russia would sue but it is thought it would be either the Treasury Department or the Biden administration.
Credit ratings agency S&P last month downgraded Russia’s debt to ‘junk’ status, saying that its decision was based partly on its opinion that sanctions ‘are hampering Russia’s willingness and technical abilities to honour the terms and conditions of its obligations to foreign debtholders’.
Answering a call made initially by Kyiv, some EU member states want the proceeds of expropriated assets to help pay for the astronomical costs of rebuilding war ravaged Ukraine.
But other member states, including Germany, have expressed fear that the measure could violate international and national laws that limit the power of authorities to seize private property.
The proposals by the European Commission are expected to be discussed by EU leaders at a summit on Monday in Brussels.
Draft conclusions for the summit seen by AFP on Wednesday said leaders would support ‘further options compatible with international law being actively explored, including options aimed at using frozen Russian assets to support Ukraine’s reconstruction’.