U.S. to ban Russia from paying bondholders via American banks

May 25, 2022 7:17 AM ETJPM, CBy: Yoel Minkoff, SA News Editor31 Comments

Falling ruble

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The U.S. Treasury Department does not plan to renew a license that allows Russia to pay its debtholders through American banks, almost guaranteeing the first Russian foreign debt default since the Bolshevik Revolution. Up until now, the Kremlin had been using JPMorgan (JPM) and Citigroup (C) as channels to pay its obligations, but the provision that allows it to do so will expire at midnight. Note that Russia defaulted on its domestic debts in 1998, which led to a wave of inflation and a devalued ruble, but the economy was able to recover quickly due to rising oil prices and international aid.

Snapshot: Institutional investors carrying Russian debt likely sold their holdings before Wednesday's deadline, according to attorney Jay Auslander, who has previously litigated similar crises like the one in Argentina. Entities that are still holding the bonds are either distressed debt investors or those willing to litigate things in court over the next several years. Russia has also prepaid its two bonds that are due this month, so expect a default around late July, when the grace period for the bonds expires.

Some don't understand the strategy here as sanctions already prevent Russia from borrowing in international markets. Moreover, much of the economic pain that a default can bring to a nation's financial sector has already happened in Russia and it appears that the only ones being hurt in this situation would be U.S. bondholders. Others point out that a sovereign default could elevate Moscow's borrowing costs, putting pressure on its banking system and hurting economic growth in the long-run.

Treasury Secretary Janet Yellen: "If Russia is unable to find a way to make these payments, and they technically default on their debt, I don't think that really represents a significant change in Russia's situation," she told reporters at a G7 finance ministers meeting last week. "They're already cut off from global capital markets, and that would continue."

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