America’s decision not to extend Russia’s privilege to pay bondholders could bring Russia to the brink of default.
The US Ministry of Finance announced on its website last night that Russia’s bond payment license will expire at 00:01 midnight on May 25 and this period will not be extended. The revoked license allowed Russia to pay interest and payments to American bond investors.
Thanks to this concession, Russia was able to make bond payments. However, the failure to extend the deadline raised the possibility of Russia’s default. In this case, Russia may default because it cannot pay its bonds for the first time in 100 years.
Russia has approximately $2 billion in bond payments to be made before the end of the year.
The sanctions imposed by Western countries upon Russia’s invasion of Ukraine on February 24 and the steps taken by Russia against these sanctions began to create obstacles to cross-border monetary mobility. But Russia was making an effort to continue paying bondholders despite this.
Jay Auslander, a lawyer from law firm Wilk Auslander, said, “If the bondholders don’t get their money when the time comes to pay, Russia will default on its government debts. With the cancellation of the license, it is not possible to pay the bondholders.”
While Russia’s license only applies to American bondholders, the complexity of payments and the fact that American financial institutions are a key part of the global financial system will also make it harder for Russia to pay other bondholders.
On May 20, Russia managed to pay off two international bonds, one in euro and the other in dollar, a week before the deadline.
But even if Russia rushed to deposit the money into their bank accounts before the license expired, there might not have been enough time to complete the complex payment process, which often takes several days.
A Far Eastern bondholder said that the payment still has not reached the firm’s account today. Russia has 30 days for two payments.
Russia’s $40 billion worth of international bonds had come to the fore in recent weeks, after discussions on whether to extend this concession.
US Deputy Finance Minister Wally Adeyemo said earlier that the payments were blocking funds Moscow used to finance its war in Ukraine, which was a “sign of success” of America’s sanctions policy.
Finance Minister Janet Yellen noted last week that Washington is unlikely to extend Russia’s license.
Many countries are in default due to shortage of cash. But the situation in Russia, which is not in financial trouble, is different. Russia’s debt payments are quite low compared to the income it receives from oil and natural gas. Russia earned $28 billion in revenue in April alone, with the contribution of the increase in energy prices.
President of the Duma, the lower house of the Russian Parliament, Vyacheslav Volodin, in his speech to the parliamentarians yesterday, called for the possibility of stopping the payment of foreign debts to be discussed. Volodin voiced dissatisfaction with the fact that Moscow continues to make payments despite the freezing of Russia’s national reserves abroad.