US pushes Russia's default

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The US scrapped an exemption that allowed Russia to pay creditors directly in dollars. This could cause Russia to default even though it has enough money. It doesn't bother the ruble.

The main building of the Central Bank of Russia in Moscow

In order to further increase the pressure on Russia over the attack on Ukraine , the US is making it more difficult to repay Russian foreign debt. An exemption from the US Treasury Department expired on Wednesday night, which previously allowed Russia to continue to pay its creditors directly in dollars despite the sanctions.

US Treasury Secretary Janet Yellen hinted last week that this waiver is unlikely to be extended.

The expiration of the waiver now makes it more likely that Russia will soon be unable to service its debt. According to Reuters news agency, it would be the country's first major default in more than a century.

In total, Russia has foreign debts of $40 billion. Almost two billion US dollars are due this year – in the form of interest or repayments. Another repayment is due this Friday. 

Payment default is more likely

After the Russian invasion of Ukraine on February 24, 2022, the West imposed a series of economic sanctions, to which Russia responded with countermeasures. Although this has made it difficult to transfer funds across borders, Russia has struggled to pay its international creditors on time. With a few minor exceptions, the country has managed to do this so far. That could change now.

Exchange office in St. Petersburg

“If When payments are due and the bondholders don't see any money even after the grace period, then Russia is in arrears,” Reuters quoted Jay Auslander, a partner at the New York law firm Wilk Auslander. “Now that the exception rule is gone, there seems to be no way to pay the bondholders.”

The exception rule only applied to payments to US citizens and institutions. But because American banks and institutions play such an important role in the international financial system, payments to creditors in other countries could also be made more difficult.

Last Friday, after Finance Minister Yellen announced that she was unlikely to extend the exemption rule, Russia brought forward two payments on government bonds that were due – one in euros and one in dollars.

An unnamed bondholder in Asia told Reuters it has not yet received any payment. However, a grace period of 30 days applies to both Russian bonds.

Decoupled from western payment systems: Russian banks, here Sberbank

It's not the money

Should there be a Russian default, however, it will not be because Russia has no money. Given the currently high oil and gas prices, Russia is making a lot of money from energy exports and was able to take in 28 billion US dollars in April alone.

At the same time, however, there are also voices in Russia that are against further servicing of Russia's foreign debt. According to Reuters, a senior parliamentarian said on Tuesday that the Russian lower house, the Duma, should examine whether debt service could be stopped. Russian voters are unhappy that Moscow continues to service its debt while its foreign exchange reserves are frozen abroad, the argument goes.

As part of the sanctions against Russia, Western countries and Japan held around half of Russia's foreign exchange reserves frozen abroad, totaling $640 billion.

Until recently, Russian government bonds were considered investment grade. This status also allowed institutional investors, such as large insurance companies, to invest money in Russian debt securities. However, since the Russian attack on Ukraine, the major rating agencies have suspended their assessment of Russia's creditworthiness.

The ruble is getting stronger

The speculation about an impending Russian default hasn't hurt the ruble, however Quit, quite the opposite. The ruble appreciated against the US dollar on Wednesday to its highest level since 2018. Against the euro, the Russian currency even hit a seven-year high.

According to experts, the ruble is benefiting from capital controls in Russia, in addition, exports have fallen significantly. In addition, new rules for the exchange of foreign currency for gas exporters were introduced on Monday.

Meanwhile, the Russian central bank announced that it would bring forward its interest rate meeting scheduled for mid-June to tomorrow, Thursday. Experts expect a further significant reduction in key interest rates, which are currently at 14 percent.