US pushes Russia to the brink of default

Western countries have sanctioned about half of Russia’s foreign exchange reserves – about $315 billion – over its invasion of Ukraine. Although the US Treasury has allowed Russia to use some of its frozen assets to repay some dollar investors, the Biden administration this week blocked the country’s access to its stocks.
This could force Russia to offer to pay its debts in rubles – or not at all. Either action would constitute default, Fitch Ratings said last month.

“Significant amounts of our reserves are blocked in foreign countries, so if this blockage continues and these transfers are blocked from the blocked amounts, then they will be served in rubles,” the Kremlin spokesman said on Wednesday, Dmitry Peskov at a press conference. “If that’s not possible, then in theory, of course, a default situation can be arranged.”

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

“There’s no reason for a real default,” Peskov said. “Not even close.”

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

Cut Russia off its dollars

The Treasury had allowed Russia to use part of its foreign exchange reserves to minimize the pain inflicted on the country’s creditors. JPMorgan estimates that Russia had about $40 billion in foreign currency debt at the end of last year, about half of which was held by foreign investors.

But the images of dead civilians on the streets in Bucha have led Western countries to impose more sanctions and to tighten the screws even more on Moscow.

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

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

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

Russia last defaulted on its domestic debt when the country was thrown into a financial crisis by a collapse in commodity prices in 1998. Its last foreign currency default came in 1918 when Bolshevik leader Vladimir Lenin repudiated the bonds issued by the Tsarist government.

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

Interest payments due Wednesday have a 30-day grace period. But rating agencies could declare Russia in default before the end of that period if Moscow makes it clear that it has no intention of paying.

– CNN’s Chris Liakos and Matt Egan contributed to this report

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