The US may block Russia’s ability to make payments on its government debt by the end of May, Bloomberg reported on Tuesday citing people familiar with the matter.
According to the publication, in order to boost financial pressure on Moscow, the US Treasury Department’s Office of Foreign Assets Control is poised to scrap a temporary exemption on Russia’s debt payments once it expires on May 25. The waiver was granted after Washington introduced sanctions on Russia in response to the launch of a military operation in neighboring Ukraine, which was highly criticized in the US. This allowed Moscow to make coupon payments even when nearly all other financial transactions were banned. Scrapping the exemption would effectively put a block on Russian payments to US investors.
Moscow’s inability to meet its debt obligations could be viewed as a default, analysts say, albeit an “artificial” one, as the country remains financially capable of paying but would be prevented by sanctions from doing so.
Russia has made all of its scheduled payments to creditors so far, and officials have repeatedly stated that it is equipped to continue doing so in the future.
However, it is currently unclear how payments can continue being made if the US exemption is allowed to lapse.
According to Bloomberg sources, some Treasury officials believe that Russia should be allowed to pay its debt because it would drain the country’s foreign-currency reserves and thus force it to redirect the funds it could otherwise spend on the ongoing military operation in Ukraine. But analysts say that Russia’s debt payments are a drop in the bucket compared to its profits from exports of oil, gas and other commodities. According to analysts from Statista, Russia’s government debt was $65 billion as of December 2021, while the value of its exports amounted to nearly $276 billion.
Russia is next due to make a debt payment on May 27, which will be on foreign bonds maturing in 2026 and 2036. Overall, the country is facing more than $490 million in foreign-currency bond payments by the end of June.
Carlos de Sousa, an investor at Vontobel Asset Management in Zurich, told Bloomberg that Russia is very likely to default on its obligations, but this would hardly be a significant development.
“It continues to be our baseline scenario that a default will happen… I don’t know why the US would renew the carve-out. Russian sovereign debt is very low, they still have resources and some money flowing in. So for them to continue to service the debt is not too onerous. The Russian government just wants to keep the reputation,” he stated.
Russia has recently accused the US of trying to engineer an artificial default by blocking payments, since the country is willing to pay its debt and has the resources to do so. The Kremlin has described the situation as a default of the Western financial system, due to its failure to fulfill its financial obligations to Russia.
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