October 7, 2022

WASHINGTON — The Biden administration will start blocking Russia from paying American bondholders, increasing the likelihood of the first default of Russia’s foreign debt in more than a century.

An exemption to American sanctions has allowed Russia to keep paying its debts since February. But that carve out will expire on Wednesday, and the United States will not extend it, according to a notice published by the Treasury Department on Tuesday. As a result, Russia will no longer be able to pay interest it owes on billions of dollars in debt held by American investors. As a result, Russia will be unable to make billions of dollars of debt and interest payments on bonds held by foreign investors.

Biden administration officials had debated whether to extend what’s known as a general license, which has allowed Russia to pay interest on the debt they sold, but officials ultimately determined that a Russian default would not have a significant impact on the global economy and allowed it to lapse.

Treasury Secretary Janet L. Yellen said at a news conference last week that the exemption was created to allow for an “orderly transition” so that investors could sell securities. It was always intended to be for a limited time, she said. She noted that Russia’s ability to borrow has already essentially been cut off.

“If Russia is unable to find a legal way to make these payments, and they technically default on their debt, I don’t think that really represents a significant change in Russia’s situation,” Ms. Yellen said. “They’re already cut off from global capital markets, and that would continue.”

Although the economic impact of a Russian default might be minimal, it was an outcome that Russia had been trying to avoid and represents an escalation of U.S. sanctions. Russia has already unsuccessfully attempted to make bond payments in rubles and has threatened to take legal action, arguing that it should not be in default if it is not allowed to make payments.

“We can only speculate what worries the Kremlin most about defaulting: the stain on Putin’s record of economic stewardship, reputational damage, the financial and legal dominoes a default sets in motion, and so on,” said Tim Samples, a legal studies professor at the University of Georgia’s Terry College of Business and an expert on sovereign debt. “But one thing is rather clear: Russia was keen to avoid this scenario, willing even to make payments with precious nonsanctioned foreign currency to avoid a major default.”

Russia has two foreign-currency bond payments due on Friday, both of which have clauses in their contracts that allow for repayment in other currencies if “for reasons beyond its control” Russia is unable to make payments in the originally agreed currency.

Russia owes about $71 million in interest payments for a dollar-denominated bond that will mature in 2026. The contract has a provision to be paid in euros, British pounds and Swiss francs. Russia also owes 26.5 million euros in interest payments for a euro-denominated bond that will mature in 2036, which can be paid back in alternative currencies including the ruble. Both contracts have a 30-day grace period for payments to reach creditors.

The Russian finance ministry said on Friday that it had sent the funds to its payment agent, the National Settlement Depository, a Moscow-based institution, a week before the payment was due.

The finance ministry said it had fulfilled these debt obligations. But more transactions are required with international financial institutions before the payments can reach bondholders.

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