There is increasing pressure raining down on Russia from the United States economically. America is pushing the nation to the edge of a historic debt default this week by refusing to extend its license to pay bondholders. This comes as Washington is seeking to increase more and more pressure on Putin after he invaded Ukraine.
The U.S. Treasury Department released information on their website this week that it would allow a license to lapse which expired at 12:01 am ET on May 25th. This allowed Russia to make interest and maturity payments on their sovereign debt to people within the United States.
The waiver that had been in place enabled Russia to keep up with government debt payments, but now that it has expired, default on that debt seems likely. This will be true on the $40 billion of international bonds that Russia has. This will be the first major default for more than a century.
The sanctions that have been imposed by the United States since that war was starting in Ukraine, along with countermeasures from the Kremlin have made the movement of money difficult across national borders. Up until this week, Russia has made an effort to continue paying bondholders.
But now, with $2 billion in payments due before the year-end, time is ticking away.
Jay Auslander, a partner at the law firm Will Auslander, said, “If the bondholders don’t get their money when the money is due, factoring in any grace periods that apply, Russia will be in default on a sovereign debt. With the waiver gone, there seems to be no way for bondholders to get paid.”
Russia has been scrambling for days now to make payments on two international bonds. The National Settlement Depository (NSD) of Moscow indicated that they received hard currency to make the payment, but they could not give any real details on how it would be executed. So, no one really knows if the payments will ever get through the chaotic international financial markets. One of the bondholders in Asia said that payment had not arrived in his firm’s account by Wednesday of this week. Russia does have a 30-day grace period for payment.
JPMorgan wrote a note to their clients indicating that there was some “residual uncertainty” about the payment, but they believed that it had been made. They said that their focus is now on the next two payments due on June 23rd and 24th.
Jonny Goulden at JPMorgan wrote, ”The 24th June bond is paid offshore and so without (the U.S. Treasury) General License 9C will presumably not be able to be made.”
Russia’s foreign ministry said the U.S. decision not to extend a waiver that would allow Russia to service its bonds in foreign currencies would impact foreign investors first.
Things will get even worse for Russia in the coming days when the European Union is likely to agree on an embargo on Russian oil imports.
In the past, Russia was rated investment-grade by credit rating agencies. But since their war against Ukraine, major rating agencies have stopped giving an assessment of the country. Russia has been effectively shut out of international capital markets.
“The Russian economy is already under heavy sanctions, so the immediate consequences of the default will probably mean not much to the economy,” said Alexey Bulgakov who is the head of fixed income research at Renaissance Capital.
When this has happened in other countries, creditors have been known to go after physical assets like navy vessels and presidential aircraft.
How much longer can Putin stand up to such international pressure?