Washington Pushes Moscow To Default By Impeding Debt Payments

Amid a looming new sanctions package, the US Treasury Department’s new move would prohibit Russia from using funds held in American banks to pay debt obligations.

The Treasury Department on Monday prohibited Russia from withdrawing funds held in American banks to pay its debt obligations, a major escalation aimed at forcing the Kremlin to pick between a catastrophic default and other difficult economic measures.

Biden’s administration will separately on Wednesday announce an additional sweeping sanctions package that includes a ban on all new investment in Russia, sanctions on Russian banks and state-owned enterprises, and additional sanctions on Russian government officials. These measures have not been announced yet. These steps are being taken in coordination with the G7 and the European Union.

The US administration had allowed Russia to continue to repurpose the substantial funds it has kept in US financial institutions to make required payments on its sovereign debt. But with two large payments coming due — and amid the ongoing atrocities in Ukraine, the Treasury Department changed course, blocking the Kremlin from processing payments on the Russian bonds.

The measure means that Moscow will have to default because of missed debt payments or repurpose other government funds to meet those payments. Russia continues to bring in large amounts of money from oil and gas exports because of European dependence on Russian energy, but it has faced the increasing strain of Western sanctions. The United States and allies have announced multiple steps to hurt Russia’s economy, curbing the country’s technology exports and imposing sanctions on Russian financial institutions, the defense sector and government officials. Preventing Russia from using its international reserves to pay its debt creates another financial problem at a time of already enormous economic strain for the country.

Russia has 30 days to find another way to meet the two payments. A default would make it more difficult for Russia to borrow from international lenders, dramatically pushing up the cost of borrowing for the Kremlin.

“Beginning today, the US Treasury will not permit any dollar debt payments to be made from Russian government accounts at US financial institutions,” a Treasury Department spokeswoman said in a news release. “Russia must choose between draining remaining valuable dollar reserves or new revenue coming in, or default. … This will further deplete the resources Putin is using to continue his war against Ukraine and will cause more uncertainty and challenges for their financial system”, she added.

Biden is under growing pressure to escalate its economic strikes against Russia as scenes emerge of massacres of civilians in Ukraine. Treasury officials have argued that the steps taken so far have punished Russia with nearly unprecedented speed, telling reporters in a call Friday that Russia’s economy is projected to contract by more than 10 percent this year.

By other measures, Russia’s economy has weathered the economic countermeasures announced so far. After initially falling dramatically, the ruble has bounced back to close to its pre-invasion value. And even though about half of Russia’s foreign reserves have been hit by sanctions, the Kremlin still has access to them at a premium to offset the costs of the war.