Russia moved closer to the brink of default after the US payments license expired

The United States on Wednesday pushed Russia closer to the brink of a historic debt default by not renewing its license to pay bondholders, while Washington ramped up pressure on the country following its invasion of Ukraine.

The US Treasury Department said on its website late Tuesday that it would not renew the license that allows Russia to make interest and principal payments on its government debt to US persons, which expires early Wednesday.

That waiver has allowed Russia to maintain payments on sovereign debt, but its phasing out now seems inevitable — the country’s first major default on international government debt in more than a century.

Almost $2 billion worth of payments on Russian international bonds are due before the end of the year.

Western sanctions imposed after Ukraine’s Kremlin invasion on February 24 and countermeasures from Moscow have hampered cross-border money movement, but Russia has made a conscious effort to keep paying bondholders.

“If bondholders don’t get their money when the money is due, Russia will default on a sovereign debt when the money is due,” said Jay Auslander, partner at law firm Wilk Auslander.

“With the waiver gone, there seems to be no way for bondholders to get paid.”

While the license only applies to US persons, its expiration will make it difficult for Russia to pay other holders given the integral role US institutions play in the global financial system and the complexity of such payment processes.

On Friday, Russia brought forward payments on two international bonds — one in euros and one in dollars — a week ahead of their due dates.

But his push to get the money into creditors’ bank accounts before the waiver expires may not have allowed enough time for an often multi-day and complex payment process.

An Asia-based bondholder said the payment hadn’t reached the company’s account by Wednesday.

Russia has a 30-day grace period for the two payments.

The country’s $40 billion international bonds have taken the spotlight in recent weeks amid debates over whether or not to extend the license.

US Deputy Treasury Secretary Wally Adeyemo earlier said the payments had diverted Moscow’s Ukraine war effort and were a “sign of success” for US sanctions policy.

But Treasury Secretary Janet Yellen said last week Washington is unlikely to renew the license.

Unlike most bankruptcy situations, Moscow is not short of money.

Debt service fees pale in comparison to oil and gas export earnings – in April alone, rising energy prices allowed Russia to rake in $28 billion in revenues.

Russia’s top lawmaker on Tuesday called on the lower house of parliament to consider the possibility of halting external debt service, saying voters were unhappy that Moscow is continuing to pay while its national reserves held abroad are frozen.

Bonds aren’t the only focus, however, as the financial struggle escalates.

Sanctions imposed on Russia for starting Europe’s biggest land war since World War II include a freeze on about half of Russia’s $640 billion in foreign exchange reserves.

According to Germany, the European Union is expected to agree to an embargo on Russian oil imports “within a few days”.

Moscow is calling its nearly three-month-old invasion a “special military operation” to rid Ukraine of fascists, a claim Kyiv and its Western allies have described as a baseless pretext for an unprovoked war.

Russian lawmakers have also introduced a bill to allow for the takeover of foreign companies that have left the market there in defiance of Moscow’s crackdown on Ukraine.

Russia was previously rated investment grade by rating agencies, but major rating agencies have stopped rating the country since the Ukraine conflict.

Now, a default could further increase tensions as it will prevent Russia from regaining access to international capital markets until creditors are fully repaid and all legal cases arising from the default are settled.

Past defaults, such as by Argentina, have prompted creditors to go after real assets like a naval ship and the country’s presidential plane.

It could also create barriers to trade if countries or companies that would normally do business with Russia have self-imposed rules preventing them from doing business with an insolvent company.