Treasury Department blocks Russia from paying debts as West prepares new sanctions

The announcement comes as pressure has mounted on Western economies to tighten sanctions on Russia over the apparent massacre of Ukrainian civilians, prompting President Joe Biden to reiterate his accusation that Vladimir Putin is a war criminal.

The Treasury had already essentially moved freeze Russian state assets held at US institutions, but now Moscow will not allow access to those dollars, even to meet its obligations to bondholders. The last payment was due on Monday.

“As of yesterday, the US Treasury Department will not allow dollar debt payments from Russian government accounts with US financial institutions,” a Treasury Department spokesman said in a statement Tuesday. “Russia must choose between using up the remaining valuable dollar reserves or generating new revenues or defaulting.”

“This will further deplete the resources Putin is using to continue his war against Ukraine and create more uncertainty and challenges for its financial system,” the spokesman said.

The additional sanctions, announced in coordination with the European Union and the Group of Seven nations, will impose significant costs on Russia, including greater economic, financial and technological isolation, according to people familiar with the plan. The Institute of International Finance estimates that Russia’s economy will shrink by up to 15 percent this year.

A sanctions package proposed to member countries by the EU on Tuesday would halt Russian supplies of coal from the bloc’s energy imports, ban Russian ships and trucks from entering the EU and impose tougher sanctions on four key Russian banks, from which they are completely cut off would be the markets. The European plan, however, halts before a total ban on Russian oil imports amid opposition from countries led by Germany.

Although the Kremlin is prevented from accessing financing from Western markets, a default would complicate future efforts to rebuild Russia’s links with the world economy.

“The US Treasury realized it had leverage because the Russians don’t want to default,” said Tim Ash, senior sovereign strategist at BlueBay Asset Management in London. “It’s a message to the Russians: if you want to avoid a default that will have a long-term impact on your economy, get out of Ukraine.”

The US and its allies have imposed devastating sanctions on the Russian economy since the invasion, initially sending the currency into freefall. This sparked a furious effort by Russia’s central bank to stabilize the ruble, which has rallied in recent weeks, helped in part by a stream of Russian oil and gas revenues.

Though Russia’s sanctions had severely limited bondholders’ ability to pay, the Treasury Department had allowed US banks to process those payments, an exemption scheduled to expire on May 27. That reflected a desire by the US and its allies to avoid the potential knock-on effects of a Russian default on the rest of the world economy, said Josh Lipsky, director of the Atlantic Council’s GeoEconomics Center.

It’s now clearer that Russia’s exposure to other global financial institutions is unlikely to cause contagion in the global economy if it defaults on its sovereign debt, Lipsky said.

The Managing Director of the International Monetary Fund, Kristalina Georgieva, said last month that a default is unlikely to trigger a global financial crisis. The banks’ total exposure to Russia was about $120 billion, an amount that, while not insignificant, is “not systemically important,” she said said in an interview with CBS’ Face the Nation.

Not everyone is so optimistic about the contagion effects.

World Bank chief economist Carmen Reinhart said last month that was the case difficult to know who is invested and exposedparticularly non-banks, arguing that a default could impact other emerging markets and institutions in ways that are difficult to predict.

In any case, a default would likely have huge consequences for the Russian economy.

Unlike Russia’s last default after the 1998 currency crisis, the sanctions imposed on the country will make it extremely difficult for the government to negotiate a debt restructuring with bondholders. Nor will it be able to turn to the IMF for help like other countries do with a typical debt restructuring.

“This is now a decades-long backlog that will be part of their economy no matter what happens in the months and years ahead coming,” Lipsky said. “It’s going to affect their creditworthiness, it’s going to affect their ability to access debt for years. If they borrow something, it will be at a much higher interest rate.” Treasury Department blocks Russia from paying debts as West prepares new sanctions

Fry Electronics Team

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