The Biden administration imposed sanctions on Russia’s central bank shortly after the war began, but it issued a special license exempting bond payments, allowing Russia to continue paying its loan obligations. But that license was due to expire this week, and the Treasury now says it will not be renewed. This means that US banks will not be able to process debt payments when Russia tries to make them. In total, the Russian government owes about $20 billion in bonds, mostly in dollars, and it owes about $500 million in interest payments over the next month, according to Gerard DiPippoprincipal researcher of the economics program of the Center for Strategic and International Studies.
“This will make the likelihood of a default now significant,” said Adam Smith, a partner at Gibson Dunn and a former Obama administration sanctions chief. “We’ve never done this in an economy like this before.”
The Treasury announcement is part of a much larger financial campaign against Russia in response to the invasion. Russia’s economy set to shrink by up to 15% on Western sanctions, White House says, as US and allies target Kremlin elites, block Moscow from accessing its international currency reserves and blocked key technology. imports, among other measures.
Global economic tremors complicate Western leaders’ sanctions on Russia
Being forced into default would add to Russia’s list of economic black spots, although experts give different assessments of its immediate impact on the Russian economy. In Germany last week, at a conference of economic leaders from the Group of Seven Western industrialized nations, Treasury Secretary Janet L. Yellen downplayed the repercussions of a Russian default, pointing out that the country is already largely unable to raise funds from international creditors due to existing sanctions and the flight of investors because of the war.
“Russia is currently unable to borrow from global financial markets; it does not have access to capital markets,” Yellen told reporters. “If Russia is unable to find a legal way to make these payments, and technically defaults on its debt, I don’t think that really represents a significant change in Russia’s situation. They are already cut off from global capital markets, and this would continue.
Yet a default from Russia would mark the huge decline of its international pedigree. Governments issue debt to raise funds, but they must repay what they owe to attract international capital and ensure low borrowing costs. Although repeatedly hit by international financial sanctions since the start of the war in late February, Russia has so far fulfilled its obligations to international bondholders. Some sanctions experts say failure to make these payments would cement long-term consequences for Russia, ensuring investors would stay out of the country even if the war ended.
Russia should try to find alternative ways to make the payments, but it is unclear whether it will be able to do so. Ariel Cohen, a senior fellow at the Atlantic Council Eurasia Center and a fellow at the Council on Foreign Relations, said it was possible that Russia – buoyed by energy sales – could still find a way around US financial institutions to pay bondholders. But he said he doubted the country’s ability to do so.
“It shows the strategy being pursued to cripple the Russian economy and make it pay for a long time,” said Mark Sobel, who previously served as deputy assistant secretary for international monetary and financial policy at the Treasury Department. “They’re going to have a deep recession and the money won’t come back. This defect is one of them.