U.S. Pushes Russia to the Brink of Default

The United States is pushing Russia to the brink of a potential sovereign debt default by preventing the country from paying holders of that debt funds due on Monday.

The U.S. stopped Russia paying its bondholders more than $600 million on Monday from reserves the country holds in U.S.-based banks, potentially forcing the Kremlin to use its other dollar reserves to pay down the debt.

If Russia does not make debt repayments using the dollars its government has access to, the country risks a sovereign debt default.

The U.S. move comes amid the Russian invasion of Ukraine which began on February 24 and has now lasted more than month, as Ukrainian forces continue to put up fierce resistance.

"Russia must choose between draining remaining valuable dollar reserves or new revenue coming in, or default," a Treasury Department spokesperson told Reuters.

As part of sanctions against Russia, the U.S. froze the Central Bank of Russia's access to around $300 billion in foreign exchange and gold reserves held in U.S. banks. However, the Treasury was allowing the Russian government to use those funds to make coupon payments on dollar-denominated debt on a case-by-case basis.

On Monday, the Treasury decided to prevent Russia from doing this as a $552.4 million principal payment on a maturing bond became due. A separate $84 million coupon payment was also due on Monday on a 2042 sovereign dollar bond.

Russia has the ability to make the payments using the gold and foreign currency assets that are still available to it as the U.S. was only able to freeze access to around $300 billion of Russia's total reserves of around $640 billion.

However, using those reserves to service its national debt would mean the country had less to spend on other expenses, including the ongoing war against Ukraine.

So far, Russia has avoided a sovereign debt default despite the U.S. and its allies imposing significant sanctions on President Vladimir Putin's government. These have included cutting Russia off from the SWIFT international payments system and a U.S. ban on Russian energy imports.

A default would occur if Russia does not make the payments within the required timeframe or if the country pays in rubles where other currencies, such as the dollar and euro, were specified.

That could have major implications, not only for Russia but potentially for international markets as well. Russia has a total of 15 international bonds outstanding with a combined face value of about $40 billion.

JPMorgan Chase had been processing debt payments for Russia but was stopped by the Treasury on Monday, Reuters reported, citing a source familiar with the matter. Russia reportedly has a 30-day grace period to make Monday's payment.

Russia has recently demanded that so-called "unfriendly" countries pay for its energy exports in rubles—a move rejected by the Group of Seven (G7) nations. The U.S. decision on Russia's debt repayments could intensify pressure from Putin for payment in rubles.

Newsweek has asked the U.S. Department of the Treasury for comment.

Update 04/05/22 08.18 a.m. EDT: This article was updated to include more information on Russia's foreign currency sovereign debt.

Vladimir Putin Speaks at a Press Conference
Russia's President Vladimir Putin attends a press conference with his Belarus counterpart, following their talks at the Kremlin in Moscow on February 18, 2022. The U.S. has taken steps that may push Russia toward default. Sergei GUNEYEV / Sputnik / AFP/Getty Images