Washington Blocks Russia’s Bond Payments From U.S. Based Reserves

The United States prevented the Russian government on Monday from paying holders of its sovereign debt of more than $600 million from reserves held at American banks. The U.S. government’s move is the latest in a wave of sanctions and restrictions aimed to cripple Russia’s economy and mount pressure on Moscow following its invasion of Ukraine.

While foreign currency reserves held by the Russian central bank at U.S. financial institutions have been frozen since the invasion of Ukraine was launched, the U.S. Treasury Department had so far allowed Moscow to use those funds to make payments on dollar denominated sovereign debt.

However, on Monday, just as the largest of those payments came due, including a $552.4 million principal payment on a maturing bond, the U.S. government decided to cut Moscow’s access to the frozen funds.  An $84 million coupon payment was also due on Monday on a 2042 sovereign dollar bond.

The U.S. government’s move will force Russia to make a decision whether to use dollars that it has access to for payments on its debt or for other purposes including to support its war effort. If it chooses not to use them for bond payments, Russia will face a historic default.

The measures come amid the U.S. and the EU plan to impose new sanctions on Moscow over civilian killings in Ukraine.

Russia, which has a total of 15 international bonds outstanding with a face value of around $40 billion, has managed to avoid default on its international debt so far despite unprecedented Western sanctions. But the task is getting harder.

It was last allowed a payment of $447 million in coupon payments on a 2030 sovereign dollar bond, due last Thursday. It was at least the fifth such payment since the war began.

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

While Russia is not able to access international borrowing markets due to the West’s sanctions, a default would mean the access restriction would resume until it fully repays creditors and any legal cases stemming from the default are settled even if the sanctions are lifted.

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