U.S. won’t let Russia pay its debt at American banks, forcing Moscow to default or drain money from its war machine

April 5, 2022, 9:07 AM UTC

The U.S. Treasury has halted dollar debt payments from Russian government accounts at U.S. banks, increasing pressure on Moscow to find alternative funding sources to pay bond investors.

The move is designed to force Russia into choosing among three unappealing options — draining dollar reserves held in its own country, spending new revenue, or going into default, said a spokesperson for the Treasury’s Office of Foreign Assets Control who discussed details of the decision on condition of anonymity.

The change comes as a payment on the country’s sovereign debt was due Monday and is intended to further ratchet up pressure on Russian President Vladimir Putin to end his invasion of Ukraine. It follows accusations over the weekend that Russian troops massacred civilians in Bucha and other Ukrainian towns. 

A carve-out in U.S. policies has allowed overseas and U.S. investors so far to receive payments on Russian foreign-currency debt, even as restrictions complicate the process. The exemption is set to expire on May 25.

“It seems to me that it is a U-turn of what the U.S. government allowed on March 17, when Russia paid a $117 million coupon,” said Carl Wong, head of fixed income at Avenue Asset Management Ltd. in Hong Kong, which doesn’t own any Russian dollar debt.

Despite warnings from credit-rating companies and others, Putin’s government has so far stayed current on its foreign debt obligations — many of which have been relatively small when compared to its full load. A once-$2 billion dollar bond that matured Monday served as the most recent stress test, though Russia was able to buy back about three-quarters of the outstanding amount in rubles before the note came due. 

The latest U.S. move will intensify scrutiny on payments due May 27 for interest owed on sovereign dollar and euro notes due in 2026 and 2036, data compiled by Bloomberg show.

Russia’s central bank said last week its foreign-currency and gold reserves plunged to just $604.4 billion as of March 25, the lowest level since last August. It marks a $38.8 billion drop from a February peak, underscoring the drain since Russia began the invasion.

It can still receive payments for oil and gas as sanctions imposed by the U.S. and its allies exclude energy transactions, an exception that’s set to hand Putin a $321 billion windfall this year if the commodities continue flowing.

The war prompted sweeping sanctions and handcuffed the central bank after the seizure of an estimated two-thirds of its reserves. Although Governor Elvira Nabiullina has acknowledged that the curbs imposed on the Bank of Russia meant it couldn’t intervene in the market, she’s said it sold foreign currency to support the ruble on Feb. 24, when the invasion began, and the following day.

Explaining the decline in reserves since Feb. 18, the central bank cited in a statement: interventions, foreign-exchange refinancing operations and a currency revaluation of assets.

Russia has been working in recent years to remove the dollar’s hold over its economy and financial markets, which means it’s hacked its holdings of U.S. Treasuries and taken dollar assets from its sovereign wealth fund.

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