Russian President Vladimir Putin attends the summit of the Collective Security Treaty Organization (CSTO) in the Kremlin in Moscow, Russia, May 16, 2022.
Sergey Guneev Satellite through Reuters
The United States has said it will not extend the exemption, which allows Moscow to pay foreign debt to US investors in US dollars, which could potentially force Russia to default.
Until Wednesday, the US Treasury Department granted a key exemption from sanctions by Russia’s central bank, which allowed it to process payments to dollar-denominated bondholders through US and international banks on a case-by-case basis.
This allowed Russia to meet its previous debt repayment deadlines, but forced it to use the accumulated military chest of foreign exchange reserves to make payments.
However, the Foreign Assets Control Service of the Ministry of Finance allowed the release to expire at 12:01 pm ET on Wednesday, it was announced in a newsletter on Tuesday.
Russia has amassed significant foreign exchange reserves in recent years and has the means to pay, so it is likely to challenge any declaration of non-compliance on the grounds that it tried to pay but was blocked by a tight sanctions regime.
Moscow has a flood of debt service deadlines this year, the first on Friday, when 100m euros in interest are due on two bonds, one of which requires payment in dollars, euros, pounds or Swiss francs, while the other could be serviced in rubles.
Reuters and the Wall Street Journal reported on Friday that Russia’s finance ministry had already transferred funds to make the payments, but another $ 400 million in interest should fall by the end of June.
In the event of a missed payment, Russia will face a 30-day grace period before it is likely to be declared non-performing.
Russia has not overdue its foreign currency obligations since the 1917 Bolshevik revolution.
“Unknown territory”
Central to the consequences of OFAC’s decision not to extend the release is the question of whether Russia will be considered unfulfilled.
Adam Solowski, a partner in the Financial Industry Group at global law firm Reed Smith, told CNBC on Friday that Moscow was likely to say it was not in default because payment was impossible even though it had the funds available.
“We’ve seen this argument before, when OFAC sanctions prevented payments, the sovereign issuer said they were not in default because they tried to make the payment and were blocked,” said Solowski, who specializes in representing trustees of government bond default and restructuring.
“They are potentially considering a scenario of a lengthy lawsuit once the situation is resolved, while trying to determine whether there has actually been a default.
Solovsky stressed that the situation in Russia is different from the usual process of state bankruptcy, in which, as the country approaches bankruptcy, it restructures its bonds with international investors.
“This will not be feasible for Russia at the moment, because in principle no one can do business with them under sanctions, so the normal scenario we will see is not what we would expect in this case,” Solowski said.
He added that this would affect Russia’s access to global markets and could potentially lead to the confiscation of assets both at home and abroad.
“We are entering some unknown territory. This is a big world economy. I think we will see the effect of the next few days for many years,” Solowski said.
Default “for years to come”
Timothy Ash, senior sovereign strategist for emerging markets at BlueBay Asset Management, said in an email Tuesday that it was only a matter of time before Moscow failed to meet its obligations.
“The right move by OFAC, as this move will keep Russia in default for years to come until Putin remains president and / or leaves Ukraine. Russia will be able to come out of bankruptcy only when OFAC allows it. Therefore, OFAC keeps the lever, “Ash said.
“It will be humiliating for Putin, with whom he has done something great [Former Chancellor of Germany] Schroeder at a time when Russia was last on the brink of bankruptcy of the Paris Club, that great powers like Russia are paying their debts. Russia can no longer pay its debts because of its invasion of Ukraine. “
Ash predicts that Russia will lose most of its market access, even to China, in light of the default, as Moscow’s only funding will come from “excessive” interest rates.
“This means that there is no capital, no investment and no growth. Lower standard of living, outflow of capital and brains. The Russians will be poorer for a long time to come because of Putin.
Ash suggested that this would increase Russia’s isolation from the world economy and reduce its status as a superpower to a level similar to North Korea.
Burning Bridges
Agate Demara, director of global forecasting at The Economist Intelligence Unit, told CNBC on Friday that because Russia’s public debt is low and declining before the invasion, entering what the EIU sees as an inevitable default may not be a huge problem. for Russia.
“For me, this is really a signal whether Russia believes that all bridges have been burned with the West and financial investors. Usually, if you are a sovereign country, you do everything possible to avoid bankruptcy,” Demara said.
“All the moves we are seeing at the moment – at least for me – suggest that Russia is not really concerned about non-compliance, and I think that’s because Russia really expects that there will be no improvement in relations with Western countries any time soon.”
She added that criminal sanctions against Russia by the United States and Western allies are likely to remain in place “indefinitely”, as the Kremlin’s false characterization of the invasion as a “denazifying” effort means it cannot be easily reversed.
The EIU expects a hot war throughout the year and a protracted conflict thereafter as Russia and the West try to reconfigure supply chains to adapt to the new sanctions regime instead of looking for ways to end it.
Russia is still attracting significant amounts of energy exports and is trying to force European importers to pay for oil and gas in rubles to lift sanctions.
“This really shows that Putin’s strategy of burning bridges feels like he has nothing to lose,” Demara added.
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