Topline
The Treasury Department on Monday blocked the Russian government from making sovereign debt payments using dollars held at American banks, a move that greatly ramps up financial pressure on Russia by depleting its dollar reserves and brings the country closer to a potential default—which would have dire consequences.
Key Facts
While the Treasury had already frozen Russian government assets held at U.S. institutions under sanctions put in place after the invasion of Ukraine, it had still been allowing use of those funds to make payments on sovereign debt.
As of Monday, however, the Treasury announced it will no longer allow Russia to access those dollars as it tries to meet sovereign debt obligations to bondholders.
Russia had over $600 million in combined bond payments due on Monday, which is when the department decided to fully block Moscow’s access to frozen funds, according to the Treasury.
The move will “further deplete the resources Putin is using to continue his war” and forces his government to choose whether to use its own dollar holdings to make debt payments or use the money elsewhere, such as for the war effort in Ukraine, Treasury officials said.
It also greatly increases the risk of a potential default, as Moscow will now be forced to use alternative sources of funding to pay bond investors: While Russia has so far been making its payments, that will likely become increasingly complicated by heavy economic sanctions from the West.
If Russia does default, that will likely drive its last few remaining foreign investors out of the country, further devalue the ruble and Russian companies could follow the government in defaulting on their obligations.
Big Number: $40 Billion
Russia has a total of 15 international bonds outstanding with a combined face value of roughly $40 billion owed in dollars and euros. If Russia is unable to make those payments, or unable to do so in the correct currency, it will default.
Crucial Quote:
“The U.S. Treasury will not permit any dollar debt payments to be made from Russian government accounts at U.S. financial institutions,” the Treasury spokesperson said Tuesday. “Russia must choose between draining remaining valuable dollar reserves or new revenue coming in, or default.”
Surprising Fact:
If the current situation does lead Russia to default on foreign currency debt obligations, it will be the first time the country has done so since the 1917 Bolshevik Revolution.
Key Background:
The latest move from the Treasury Department comes amid increasing calls for more Western sanctions against Russia following the reported massacre of Ukrainian civilians. U.S. President Joe Biden has called Putin a war criminal, while the European Union, meanwhile, is considering a ban on Russian coal imports—the first round of sanctions potentially targeting Russia’s valuable energy markets.
What To Watch For:
Analysts at JPMorgan recently warned that Russia’s invasion of Ukraine, combined with the ongoing real estate market crash in China, could result in the biggest round of corporate defaults since the global financial crisis. The firm predicts that the global emerging market default rate will hit 8.5%, the highest level seen since 2009 (10.5%).
Further Reading:
Wall Street Banks Could Lose Billions In Russia—Here’s How Much Exposure They Have (Forbes)
EU Proposes First Energy Ban Against Kremlin, Halting Russian Coal Imports (Forbes)
Wall Street Firms Are Slashing S&P 500 Price Targets—Here’s What They Predict For Markets (Forbes)
BlackRock CEO Larry Fink Says Russia-Ukraine War Is Upending World Order And Will End Globalization (Forbes)
