- The US Treasury has blocked Russia from making bond payments using American bank accounts.
- The move complicates Moscow’s ability to pay its debts, with one analyst saying default is highly likely.
- Russia has a 30-day grace period, but could be locked out of international markets for years if it can’t pay.
It had all been going so well. Russia’s government had been surprising investors by sending payments on its foreign currency bonds, despite the sanctions slapped on the country over its invasion of Ukraine.
But on Monday the US Treasury said it would no longer allow Russia to make any dollar debt payments using accounts at American banks.
The Treasury told JPMorgan, Russia’s foreign correspondent bank, that it should not process more than $600 million of maturity and coupon payments that were due Monday, a person familiar with the matter told Insider. JPMorgan declined to comment.
Analysts said the move sharply raised the risk of a Russian default. Timothy Ash, an economist at BlueBay, told Insider he put the chances of a default at 80%.
A Russian debt default would likely be a major worry for the government, who could be locked out of capital markets for years. But it’s unlikely to have a huge impact on the global financial system, strategists said.
Here’s what to expect as Russia edged back towards default.
Why has the risk of default risen?
The US Treasury was allowing Russia to make payments to holders of dollar bonds. But it abruptly changed course Monday, saying it wanted to raise the pressure on Moscow over its war in Ukraine.
Russia now cannot use immobilized funds in US accounts to make payments, a person with knowledge of the Treasury’s thinking told Insider. That means it will have to use dollars sourced from elsewhere.
The Russian government appears to have enough dollars to pay up. It receives the greenback when it sells oil and gas and still has access to around half of its $640 billion of currency reserves, despite sanctions on the central bank, according to the country’s Finance Ministry.
However, those reserves are precious at a time when the economy is under immense pressure. Russia faces more than $2 billion of foreign debt payments this year, including the $600 million due Monday.
Ash, of BlueBay, said Russia would likely struggle to find a bank to process payments. It could be forced to turn to domestic lenders such as Gazprombank, he said, but then Western bondholders may be reluctant to receive the money.
When could Russia default?
Russia faced a $552 million maturity payment on a 2022 bond and an $84 million interest payment on a 2042 bond Monday. It now has a 30-day grace period in which to make the payment, or it will fall into a default.
If it fails to pay, it could mark the start of a long chain of defaults for the government. The government owed about $39 billion in foreign currency bonds at the end of 2021, JPMorgan has estimated, of which around $20 billion was earmarked for foreign investors.
The Treasury’s move could also stymie the ability of Russian companies to pay their debts, for example by scaring off Western banks. It was not immediately clear what the broader effects might be, however.
What impact would a default have?
Russia had made more than $700 million of payments since it invaded Ukraine in late February, in a clear sign it wants to avoid default.
Some analysts have said a default would make little difference, given Russia is already frozen out of global capital markets.
“I don’t think it’ll have a huge impact, because the economy is already pretty much cut out of international capital markets,” Andrew Kenningham, chief Europe economist at Capital Economics, told Insider last month.
However, Ash said a default would be a “nightmare” for the government. That’s because the war means Russia is highly unlikely to be able to enter the usual negotiations with bondholders that traditionally follow a default.
He said there would be “no light at the end of the tunnel”, adding that borrowing costs would likely be high for years to come.
The holders of Russian bonds would, of course, be hurt. Asset management giants such as BlackRock and Fidelity are some of the biggest foreign investors in the country.
Analysts say a default is very unlikely to trigger anything like a global financial crisis. Russia’s foreign debts are pretty small compared to many other countries, partly because the country has been under some form of Western sanctions since it invaded Crimea in 2014.
“Financial links in particular are small,” Melanie Debono, senior Europe economist at Pantheon Macroeconomics, told Insider in March. “Banks in countries most exposed are well prepared to weather any disruption.”