Since Russia invaded Ukraine, Russian companies have been scrambling to pay debt obligations to U.S.-based banks. A new round of sanctions blocking Russian payments has prevented Russia from paying its debt. The country has defaulted by attempting to pay bonds with the ruble rather than the American dollar.
Some Russian-owned bonds specify the form of payment required, i.e., dollars or euros. As a result, when Russia paid a debt in rubles, the country went into selective default for failure to meet pre-specified terms.
The Russians plan to sue, though it is not clear at this time who the intended action will be against.
Russian Finance Minister Anton Siluanov stated, “We will sue because we undertook all necessary action so that investors would receive their payments.” This information was shared with the pro-Kremlin Izvestia newspaper on Monday.
The newest U.S. sanctions against Russia are intended to put immense pressure on Russia and its economy. According to Bloomberg, such extreme measures are meant to drain Russia’s financial resources.
Initially, Russian businesses were allowed access to frozen funds to pay their collected debt in U.S. dollars. That changed last Monday when Moscow was cut off from accessing those funds. This halted a principal payment of $552.4 million that was due on a maturing bond, along with an $84 million payment on a bond set to mature in 2042. According to Reuters, the block made by the U.S. was worth more than $600 million.
Reuters was able to obtain a comment from a U.S. treasury spokesperson who stated the U.S. Treasury had halted JPMorgan’s ability to process further payments from Russia. Previous sanctions allowed monitoring of the payments but did not completely block them. The same source noted that Russian-owned debt has a 30 day grace period to make total payments.
Russia has fifteen total international bonds with a sum of around $40 billion. With new U.S. sanctions and the possibility of the EU and other governments imposing harsher sanctions, the task of paying their debts will now be much more difficult.
If Russia continues to default on its foreign debt, the consequence could be a lockout from international markets until the debt is settled, according to Business Insider.
While this should sound alarms for Russia and its economy, some strategists say it is unlikely to significantly impact the global economy.
Daniel Lenz, head of the euro rates strategy at DK Bank in Frankfurt, Germany, spoke to CBS News before the country defaulted to predict the possible effects of a Russian lockout.
“A Russian default would no longer be any great surprise for the market as a whole,” said Lenz. “If there were going to be big shock waves, you would see that already. That doesn’t mean that there won’t be significant problems in smaller sectors.”
Russia will still have some access to the American currency as it is still selling oil and gas; those commodities are paid for in part by the U.S. dollar. Russia also still has access to a percentage of its $640 billion reserves, even with the sanctions imposed by the West and EU.
