USA’s Wages a Financial War on Russia

Impairing Ability to Repay Debt

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The USA intends to end Russia’s ability to repay international debt. The US will now close the last road for Russia to pay back the billions in debt it owes to international investors thus, making a Russian-national default on its debts for the very first time, ever since the Bolshevik Revolution, utterly inevitable. The Treasury Department issued a statement that it doesn’t intend to renew the previous license which allowed Russia to pay its debtors through American-based banks. Since their first rounds of imposed sanctions, the Treasury Department had given the banks licenses to process any dollar-heavy bond payments from Russia. That window expired at midnight of May 25, 2022. There had already been signs that the Biden government was unwilling to extend the deadline. At a press conference heading into the Group of Seven finance minister meetings in Germany’s Koenigswinter, Janet Yellen, the Treasury Secretary said that the window existed “to allow a period of time for an orderly transition to happen, and for the investors to sell their securities. The expected result was that this was time-limited, says Yellen. With no license to use US banks to pay their debts, Russia definitely will not be able to repay their international bond investors. The Kremlin previously used Citigroup and JPMorgan Chase and as its conduits to pay its debtors.

Issues likely to crop up

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There were signs that the Biden administration would not extend the deadline. At a press conference before the G-7 Finance Minister meet in Germany, Janet Yellen, the Treasury Secretary said the window allowed time for orderly transitions to take place, with investors able to sell off securities and it was time-limited. Without any license to use American banks to repay debts, Russia could not repay its global bond investors. The Kremlin used Citigroup and JPMorgan Chase as conduits to repay its debt. Most institutional investors in Russian debt have already sold their holdings as this deadline was expected. Those still holding debts are distressed debt investors or those able to litigate it out over the next few years. The majority have exited and the only issue was finding buyers. The Kremlin appears to have prepared for America not allowing Russia to keep repaying bonds and prepaid two bonds ahead of the May 25 deadline. Like other Russian debt, bonds have a 30-day grace period and cause default declaration by Russia by late July, if the Russia-Ukraine war ends before then.

Expectations of Russian Debt Defaults

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Investors have expected Russian default for months with insurance contracts covering Russian debt, priced a 80% default likelihood for weeks and rating agencies like Moody’s and Standard & Poor’s placed Russia’s debt as junk. Russia never defaulted on international debts since the 1917 Revolution created the Soviet Union. Russia however did default on domestic debts during the Asian Financial Crisis in 1998, but recovered from the default with the assistance of international aid. A Russian default now, would have minimal impact on the global economy, Russia has not accessed global financial markets for months now and investors were wary about defaults. Biden officials have echoed similar sentiments. Once Russia defaults, it is expected to turn to British, American or European courts to argue being forced to default by events beyond control (force majeure) to restore its global financial markets standing. It may be difficult to win that argument as Russia was cut off from financial markets as it invaded Ukraine.