Russia Scrambles to Prevent Defaulting on Debt Payments as Sanctions Bite

Russia is scrambling to avoid defaulting on its debt repayments as the country begins to feel the effects of the crippling sanctions imposed by Western nations over the Ukraine invasion.

In an announcement on Monday, Russia's Finance Ministry said it had approved a temporary procedure for paying the country's debts in foreign currencies, but warned that it may be forced to pay in rubles because of the sanctions.

"Claims that Russia cannot fulfil its sovereign debt obligations are untrue," Finance Minister Anton Siluanov said in a statement, just says before a crucial interest payment on the country's debts is due. "We have the necessary funds to service our obligations."

After Russian President Vladimir Putin launched an invasion into Ukraine on February 24, Western countries swiftly announced tough sanctions on Russia.

The sanctions included banning certain Russian banks from SWIFT, the high security network that facilitates payments among 11,000 financial institutions.

That move hampered the Russian central bank's ability to deploy its international reserves. Other measures have targeted Putin and many of his allies in politics and business. The sanctions have sent the ruble and the share prices of many Russian companies traded overseas plunging.

Dollar-Denominated Bond Payments Due

Russia is expected on Wednesday to make a total of $117 million in interest payments on two of its dollar-denominated bonds, according to JPMorgan, the Financial Times reported. It noted that Russia hasn't been given the option of paying either of the bond's contracts in rubles.

Moscow has a 30-day grace period to make those payments. A default could make it much harder and significantly more expensive for Russia to raise money in future.

"We need to pay for critical imports. Food, medicine, a whole array of other vital goods," Siluanov said during an appearance on Russian state television on Sunday.

"But the debts we need to pay to the countries that have been unfriendly to the Russian Federation and have limited our use of foreign currency reserves—we will pay off our debt to these countries in the ruble equivalent," he continued.

"The freezing of the central bank and government's foreign currency accounts can be seen as a desire from several Western countries to organise an artificial default," Siluanov said.

According to remarks by Siluanov on Sunday, around $300 billion of Russia's $643 billion of foreign reserves have been hit by foreign sanctions.

International Monetary Fund Managing Director Kristalina Georgieva told CBS's Face the Nation program on Sunday that "in terms of servicing debt obligations, I can say that no longer we think of Russian default as improbable event."

The wave of sanctions imposed on Russia in the aftermath of the Ukraine invasion were already having a "severe" impact on Russia's economy and could result in a deep recession in the country this year, she said.

During an appearance on the state-controlled Rossiya 24 news channel on March 4, Putin urged neighboring countries "to think about how to normalize relations."

"I want to emphasize once again. We have no ill intentions towards our neighbors, and I would advise them not to escalate the situation, nor to introduce any restrictions," he said, according to news agencies.

"All our actions, if they arise, always arise exclusively in response to unfriendly actions against Russia," he added. "We do not see any need here to escalate the situation or worsen our relations."

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Russian Finance Minister Anton Siluanov
Russian Finance Minister Anton Siluanov attends the Business Russia Congress in Moscow on October 18, 2016. Russia’s Finance Ministry said Monday that it approved a temporary procedure for paying the country’s debts in foreign currencies. ALEXANDER ZEMLIANICHENKO/AFP/Getty Images