US Treasury tries pushing Moscow to "technical default"

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A notice posted on the Department of Treasury website says that Russia's general license waiver which allows Moscow to pay US debt will not be extended. The waiver is set to expire at 12:01 on Wednesday. 

This decision comes just a day after Moscow announces that it will be loosening its capital control measures against its ruble, which has been on an upward movement, becoming too "strong" a currency. The rationale is that the ruble, which has been at its all-time high in 4 years, is threatening to reduce export profit. The Finance Ministry said it will be cutting the share of foreign currency earnings from 80% to 50%

This move by Washington was expected, and it is said that it will set Russia into technical default of its debt obligations. Several US outlets anticipated and reported on this decision, but it was not confirmed by the Treasury Secretary Janet Yellen.

Although Washington had blocked Russian accounts due to the conflict in Ukraine, it issued a debt waiver because Wally Adeyemo, the Deputy Treasury Secretary, argued that such payments would divert funds from the military. According to Adeyemo, Russia paying debt was a "sign of success" for the sanctions policy of the US. 

Nevertheless, Moscow anticipated the move; the Russian finance minister last Friday said it had made early payments for a total of $99.25 million on two Eurobonds which were due on May 26, leaving Moscow with $2 billion worth of external bond payments due before the end of 2022.

As of April 1, Russia had a little over $57.1 billion of external public debt. The world's most prominent energy provider is not short on money to pay it, with doubling oil and gas revenues since the start of the war in Ukraine. The revenues from energy, alone, amount to $28 billion, according to Reuters.

The aim of removing the waiver is to damage Russia's reputation in international financial markets as it seeks to set the country into a "technical default."

“Russia is capable of repaying any of its obligations in any currency, as long as no artificial problems are created,” so the US obstacles “will not affect the real financial reputation of our country in any way,” former Russian President and current Security Council Deputy Chair Dmitry Medvedev said last week.

“Everyone understands that this is a political default, not a financial one," said Medvedev, adding that if the US were to generate obstacles in the face of Russian payment, then Russian courts should consider them either the fault of the creditor or force majeure. The Russian Finance Ministry adopted this position, offering an ultimatum: If the US does not extend the waiver, investors should seek judicial remedy from states that “illegally create obstacles to making payments.”

Medvedev also noted that Russia was willing to pay its foreign debt in rubles. However, Moscow might choose “not to pay at all and use the unspent money for precisely those purposes that those senile Americans will not like very much.”

Anton Siluanov, the Russian Minister of Finance, has said in court that Russia can prove in court that it had done everything possible to pay the debt. As soon as Western governments unblock frozen Russian accounts, investors that hold Russian bonds can take payments in rubles and convert them to other currencies.

On April 18, Adeyemo announced that Washington wants to dismantle Russia's "war machine" by disrupting its defense industry and supply chain, in other words, taking apart the Russian economy.  

Within the same month, US President Joe Biden said in response to the war in Ukraine, the United States and its allies will continue to ratchet up economic costs on the country and further isolate it.

An artificial default 

In March, Russian Finance Minister Anton Siluanov denied that Russia would be unable to make the payments.

He stated that Russia was willing to service the loan in rubles at the rate set by Russia's central bank on the day of payment. He also accused the West of coercing Russia into an "artificial default".

If Russia fails to make the bond payment, an automatic 30-day grace period kicks in, and after that, it is regarded as default on its foreign currency-held debt.

In parallel, JPMorgan analysts contended that US sanctions should not immediately limit Russia's ability to fulfill its debt.

Read more: How sanctioning Russia may be futile: The Hill

 

Interest payments to American entities on bonds issued by Russia's Central Bank, Finance Ministry, or National Wealth Fund before March 1 are "permissible through May 25." Afterwards, they would need the authorization to continue receiving these payments, according to the US Treasury.