Treasury to Block U.S. Investors From Receiving Russian Debt Payments
WASHINGTON—The Treasury Department moved to cut off Russia’s ability to make payments on its dollar-denominated sovereign debt, putting Russia on a path toward defaulting on its foreign debts this summer and deepening the country’s economic isolation after its invasion of Ukraine.
Since imposing a raft of sanctions on Russia this year, the U.S. had maintained an exemption allowing U.S. banks and investors to process and receive payments on existing Russian bonds. The Treasury said Tuesday it would allow the exemption to expire on Wednesday.
The U.S. has gradually limited Russia’s access to foreign credit since the invasion, banning it from raising additional sovereign debt from U.S. investors and blocking the Kremlin from using U.S. bank accounts to stay current on foreign debt payments. Treasury Secretary
Janet Yellen
said last week the U.S. would likely let the exemption for Americans receiving debt payments to expire.
Russia has managed to stay current on around $2.5 billion worth of foreign debt payments since the conflict in Ukraine began, largely by relying on that exemption and using unsanctioned Russian banks to send payments.
Without it in place, Russia will be unable to have U.S.-based financial intermediaries process bond payments on its behalf, which would likely cause the Kremlin to default on its foreign currency bonds, since it won’t be able to get the owed funds into investors’ accounts.
Russia faces approximately $235 million in payments due under some of its dollar-denominated bonds on June 23, and an additional $159 million due June 24, according to JPMorgan Chase & Co. research.
Missed payments would trigger a 30-day grace period from the June 23 due date and a 15-day grace period from the June 24 date, meaning that as early as July 9, creditors could call the Russian government in default if they don’t receive money in their accounts.
Investors could then seek legal remedies to receive the funds they are owed, likely in the U.K., the jurisdiction of choice for many of Russia’s foreign-currency bonds.
Much of the economic pain that a default can bring has already happened in Russia due to the broad raft of sanctions imposed since it invaded Ukraine.
Photo:
yuri kochetkov/Shutterstock
The Russian Embassy in Washington didn’t immediately respond to a request for comment on Tuesday. Russian Finance Minister
Anton Siluanov
last week said Russia intends to pay its outstanding foreign debts in rubles if sanctions complicate its ability to make payments to bondholders.
Forcing Russia into default on its foreign debts for the first time in over 100 years is one of the most pointed of all of the existing sanctions against the country, which would blemish the Kremlin’s reputation in financial markets and give the U.S. broad leverage over Russia’s return to global debt markets, analysts say.
Economists estimate that the costs associated with sovereign defaults to be roughly equal to between 2% to 3% of the size of the country’s economy—and hurt economic growth in the long-run. Not only do they typically elevate a country’s borrowing costs, they also put pressure on a country’s banking system, which often holds large amounts of underlying debt.
However, much of the economic pain that a default can bring to a country’s financial sector has already happened in Russia, thanks to the broad raft of sanctions imposed since the war began, so it’s unclear what additional impact a default would have on the economy. Additionally, some Russian holders of some of its government’s foreign debts have been paid in rubles since the war in Ukraine began, limiting the risk a default might cause to the financial sector.
The unusual and manufactured nature of a default makes it somewhat difficult to tell what the long-run impacts would be on Russia’s market access and economic growth, said
Anna Gelpern,
law professor at Georgetown University and Peterson Institute for International Economics fellow.
“In some hypothetical future market, it is hard to tell what of this would be relevant to market participants’ view of Russian foreign-denominated debt,” she said. “It will likely depend more on how this episode is resolved than how it came about.”
The broader financial consequences for the U.S. and the West of pushing Russia into default are likely to be minor, economists said.
Russian bond prices have already significantly dropped as investors anticipated the possibility of default, and Western investors hold relatively little Russian debt, said Steven Kamin, a senior fellow at the American Enterprise Institute and the former head of international finance at the Federal Reserve.
“An awful lot of this has already been anticipated and built into bond prices,” he said. “Exposure of U.S. financial institutions and Western financial institutions more generally is quite low.”
Russia had approximately $39 billion in outstanding foreign currency bonds at the end of 2021, of which approximately half were in the hands of foreigners, according to JPMorgan research. Those bonds currently trade around 10 to 20 cents on the dollar, a level they have traded at since around the end of February.
“I don’t think this poses a systemic threat from that standpoint,” Mr. Kamin said.
Write to Alexander Saeedy at [email protected] and Andrew Duehren at [email protected]
Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8
WASHINGTON—The Treasury Department moved to cut off Russia’s ability to make payments on its dollar-denominated sovereign debt, putting Russia on a path toward defaulting on its foreign debts this summer and deepening the country’s economic isolation after its invasion of Ukraine.
Since imposing a raft of sanctions on Russia this year, the U.S. had maintained an exemption allowing U.S. banks and investors to process and receive payments on existing Russian bonds. The Treasury said Tuesday it would allow the exemption to expire on Wednesday.
The U.S. has gradually limited Russia’s access to foreign credit since the invasion, banning it from raising additional sovereign debt from U.S. investors and blocking the Kremlin from using U.S. bank accounts to stay current on foreign debt payments. Treasury Secretary
Janet Yellen
said last week the U.S. would likely let the exemption for Americans receiving debt payments to expire.
Russia has managed to stay current on around $2.5 billion worth of foreign debt payments since the conflict in Ukraine began, largely by relying on that exemption and using unsanctioned Russian banks to send payments.
Without it in place, Russia will be unable to have U.S.-based financial intermediaries process bond payments on its behalf, which would likely cause the Kremlin to default on its foreign currency bonds, since it won’t be able to get the owed funds into investors’ accounts.
Russia faces approximately $235 million in payments due under some of its dollar-denominated bonds on June 23, and an additional $159 million due June 24, according to JPMorgan Chase & Co. research.
Missed payments would trigger a 30-day grace period from the June 23 due date and a 15-day grace period from the June 24 date, meaning that as early as July 9, creditors could call the Russian government in default if they don’t receive money in their accounts.
Investors could then seek legal remedies to receive the funds they are owed, likely in the U.K., the jurisdiction of choice for many of Russia’s foreign-currency bonds.
Much of the economic pain that a default can bring has already happened in Russia due to the broad raft of sanctions imposed since it invaded Ukraine.
Photo:
yuri kochetkov/Shutterstock
The Russian Embassy in Washington didn’t immediately respond to a request for comment on Tuesday. Russian Finance Minister
Anton Siluanov
last week said Russia intends to pay its outstanding foreign debts in rubles if sanctions complicate its ability to make payments to bondholders.
Forcing Russia into default on its foreign debts for the first time in over 100 years is one of the most pointed of all of the existing sanctions against the country, which would blemish the Kremlin’s reputation in financial markets and give the U.S. broad leverage over Russia’s return to global debt markets, analysts say.
Economists estimate that the costs associated with sovereign defaults to be roughly equal to between 2% to 3% of the size of the country’s economy—and hurt economic growth in the long-run. Not only do they typically elevate a country’s borrowing costs, they also put pressure on a country’s banking system, which often holds large amounts of underlying debt.
However, much of the economic pain that a default can bring to a country’s financial sector has already happened in Russia, thanks to the broad raft of sanctions imposed since the war began, so it’s unclear what additional impact a default would have on the economy. Additionally, some Russian holders of some of its government’s foreign debts have been paid in rubles since the war in Ukraine began, limiting the risk a default might cause to the financial sector.
The unusual and manufactured nature of a default makes it somewhat difficult to tell what the long-run impacts would be on Russia’s market access and economic growth, said
Anna Gelpern,
law professor at Georgetown University and Peterson Institute for International Economics fellow.
“In some hypothetical future market, it is hard to tell what of this would be relevant to market participants’ view of Russian foreign-denominated debt,” she said. “It will likely depend more on how this episode is resolved than how it came about.”
The broader financial consequences for the U.S. and the West of pushing Russia into default are likely to be minor, economists said.
Russian bond prices have already significantly dropped as investors anticipated the possibility of default, and Western investors hold relatively little Russian debt, said Steven Kamin, a senior fellow at the American Enterprise Institute and the former head of international finance at the Federal Reserve.
“An awful lot of this has already been anticipated and built into bond prices,” he said. “Exposure of U.S. financial institutions and Western financial institutions more generally is quite low.”
Russia had approximately $39 billion in outstanding foreign currency bonds at the end of 2021, of which approximately half were in the hands of foreigners, according to JPMorgan research. Those bonds currently trade around 10 to 20 cents on the dollar, a level they have traded at since around the end of February.
“I don’t think this poses a systemic threat from that standpoint,” Mr. Kamin said.
Write to Alexander Saeedy at [email protected] and Andrew Duehren at [email protected]
Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8
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