US halts Russian bond payments in bid to ratchet up pressure on Moscow

FILE PHOTO: A view shows a Russian ruble coin and a US dollar banknote in this illustration taken October 26, 2018. REUTERS/Maxim Shemetov/File Photo

NEW YORK/WASHINGTON, April 5 (Reuters) – The United States on Monday blocked the Russian government from paying holders of its sovereign debt more than $600 million from reserves held in U.S. banks, in a bid to raise pressure on Moscow and eating into its dollar holdings.

Under sanctions put in place after Russia invaded Ukraine on February 24, foreign currency reserves held by the Russian central bank in US financial institutions were frozen.

But the Treasury Department had authorized the Russian government to use those funds to make coupon payments on dollar-denominated sovereign debt on a case-by-case basis.

On Monday, as the bulk of the payments came due, including a $552.4 million principal payment on a maturing bond, the US government moved to cut off Moscow’s access to the frozen funds, according to a US Treasury spokesman.

A coupon payment of $84 million was also due Monday on a 2042 dollar sovereign bond.

The move was intended to force Moscow to make the difficult decision of whether to use the dollars it has access to for debt payment or for other purposes, including supporting its war effort, the spokesman said.

Russia faces a historic default if it chooses not to.

“Russia must choose between draining precious remaining dollar reserves or new incoming revenue, or defaulting,” the spokesperson said.

JPMorgan Chase & Co (JPM.N), which until now handled payments as a correspondent bank, has been shut down by the Treasury, a source familiar with the matter said.

The correspondent bank processes coupon payments from Russia and sends them to the paying agent for distribution to foreign bondholders.

The country has a 30-day grace period to make the payment, the source said.

DEFAULT CONCERNS

Russia can afford to pay from reserves, since sanctions have frozen about half of Russia’s roughly $640 billion in gold and foreign currency reserves.

But a withdrawal would add pressure just as the United States and Europe plan new sanctions this week to punish Moscow for the killings of civilians in Ukraine. Read more

Russia calls its actions in Ukraine a “special military operation”. Ukraine and the West say the invasion was illegal and unjustified. Images of a mass grave and the tied up bodies of people shot at close range sparked international outcry on Monday. Read more

Russia, which has a total of 15 international bonds outstanding with a face value of around $40 billion, has managed to avoid defaulting on its international debt despite unprecedented Western sanctions. But the task becomes more difficult. Read more

“What they’re basically trying to do is force their hand and put even more pressure on (to deplete) the foreign exchange reserves at home,” said David Wolber, sanctions attorney at Gibson Dunn in Hong Kong.

“If they have to do that, obviously it takes away from Russia’s ability to use those dollars for other activities, primarily to finance the war.”

It could also pressure Russian demands to be paid in rubles for gas by European customers, he added.

Russia was last allowed to make a $447 million coupon payment on a 2030 dollar sovereign bond, due last Thursday, which was at least the fifth such payment since the start of the war. .

If Russia fails to make any of its next bond payments within the predefined time frame, or pays in rubles when the dollar, euro or other currency is specified, this will constitute a default. Read more

Although Russia is unable to access international debt markets due to sanctions, a default would prohibit it from accessing these markets until creditors are fully repaid and all litigation arising from the default are resolved. Read more

Reporting by Megan Davies and Alexandra Alper. Additional reporting by Tom Westbrook; edited by Himani Sarkar and Jason Neely

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