On Monday, the United States stopped Russia from paying its sovereign debt holders more than $600m from its reserves at U.S. Banks. This was done to increase pressure on Moscow and reduce its dollar holdings.
After Russia invaded Ukraine, on February 24, sanctions were imposed that resulted in the freezing of foreign currency reserves at U.S. financial institutions.
The Treasury Department allowed the Russian government to use these funds to make coupon payments for dollar-denominated sovereign bonds on a case-by-case basis.
According to a spokesperson for the U.S. Treasury, Monday was the due date for the largest payments, which included a principal payment of $552.4 million on a maturing bond.
A coupon payment of $84 million was due Monday for a 2042 sovereign bond.
According to the spokesperson, this move was intended to force Moscow into making difficult decisions about whether to use the dollars it has for its debt payments or other purposes, such as supporting its war effort.
Russia is in danger of falling into a historical default if they do not act.
The spokesperson stated that Russia must decide between reducing its remaining valuable dollars reserves and generating new revenue, or default.
According to a source familiar, JPMorgan Chase & Co stopped processing payments as a correspondent bank.
The correspondent bank receives the Russian coupon payments and sends them to the agent for distribution to bondholders overseas.
According to the source, there is a 30-day grace period for the country to make the payment.
Russia has the ability to pay out its reserves. The sanctions have already frozen about half of Russia’s $640 billion worth of gold and foreign currency reserves.
A drawdown would increase pressure, just as the United States of America and Europe plan to impose new sanctions on Moscow this week in response to civilian deaths in Ukraine.
Russia describes its actions in Ukraine as “special military operations”. The West and Ukraine both claim that the invasion was illegally authorized and justified. International outrage erupted Monday over images of a mass grave and bodies of people shot from close range.
Russia has 15 outstanding international bonds with a face worth of approximately $40 billion. Despite unprecedented Western sanctions, Russia has been able to avoid defaulting on its international debt. The task is becoming more difficult.
David Wolber, a Hong Kong-based sanctions lawyer at Gibson Dunn, said that “they’re basically trying to force their hand and put more pressure on (to reduce) foreign currency reserves back home.”
“If they must do that, that removes Russia’s ability to use those dollars for other purposes, in essence, to fund the war.”
He said that it could also increase pressure on Russia to pay European customers roubles for gas.
Russia was allowed to last Thursday make a $447million coupon payment on a 2030 sovereign bond. This was the fifth such payment since the war started.
Russia will default if it fails to pay any of its future bond payments within the pre-defined timeframes or pays in roubles when dollars, euros, or another currency is specified.
Russia cannot access international borrowing markets because of sanctions. However, a default would prevent Russia from accessing those markets until all creditors have been fully repaid and all legal cases stemming from the default are resolved.