The US is pushing Russia to the brink of default

Western countries have sanctioned about half of Russia’s foreign exchange reserves – roughly $315 billion – because of its invasion of Ukraine. While the US Treasury has allowed Russia to use some of its frozen assets to pay off debt to certain investors, the Biden administration this week blocked the country’s access to its reserves.
This may force Russia to offer to pay its debts in rubles – or not to offer at all. Any action would mean default, Fitch Ratings said last month.

“Significant amounts of our reserves are blocked in foreign countries, so if this blocking continues and these transfers are blocked from the blocked amounts, then they will be serviced in rubles,” Kremlin spokesman Dmitry Peskov said at a press conference on Wednesday. “If this is not possible, then in theory, of course, it is possible to organize a default situation.”

Peskov argued that the default would be “artificial” because he has money to pay – he just can’t access it.

“There are no grounds for a real default,” Peskov said. “Not even close.”

The United States is trying to increase pressure on Russia after photos of the atrocities committed in the Ukrainian city of Bucha. In addition to the Treasury Department’s decision to cut off Russia’s access to dollars, the Biden administration on Wednesday announced new sanctions on Russian financial institutions and individuals, including the two adult daughters of Russian President Vladimir Putin and the wife and daughter of Russian Foreign Minister Sergei Lavrov. . .

Cut off Russia from her dollars

The Treasury has allowed Russia to use some of its foreign exchange reserves to minimize the pain it inflicts on the country’s creditors. At the end of last year, Russia’s foreign-currency debt stood at about $40 billion, JPMorgan estimates, with about half of that debt owned by foreign investors.

But images of civilians killed on the street in Bucha have prompted Western countries to impose new sanctions and tighten the screws on Moscow even more.

“This will further drain the resources that Putin is using to continue his war against Ukraine and cause more uncertainty and problems for their financial system,” a US Treasury Department spokesman said in a statement to CNN late Monday.

Russia has succeeded in keeping the ruble artificially high by raising interest rates, forcing exporters to exchange foreign currency for Russian money, and requiring, among other things, energy importers to pay in rubles.

This somewhat isolated the Russian economy from Western sanctions. But cutting Russia off its dollars will almost certainly lead to default. This could force Russia to pay higher interest on its debt if it chooses to pay.

The last time Russia defaulted on its domestic debt was when the country plunged into a financial crisis due to falling commodity prices in 1998. The last currency default occurred in 1918, when the Bolshevik leader Vladimir Lenin refused bonds issued by the tsarist government.

If the Russian government defaults, investor losses could start to mount, although Western investors have less influence over Russia than before. Sanctions since the annexation of Crimea in 2014 have already encouraged them to reduce their exposure to risk. But according to the Bank for International Settlements, Russian companies owe about $121 billion to international banks.

Interest payments due on Wednesday have a 30-day grace period. But the rating agencies may declare Russia defaulted before the end of this period if Moscow makes it clear that it does not intend to pay.

— Chris Liakos of CNN and Matt Egan contributed to this report.

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