December 1, 2023


WASHINGTON — The Treasury Department will cut off Russia’s ability to make debt payments using dollars held at U.S. banks, stepping up its effort to choke off financial resources for Russia’s military and pushing the country closer to default.

The U.S. and its allies will also unveil another battery of penalties on Wednesday, including a ban on all new investment in Russia and tighter sanctions on financial institutions, according to people familiar with the matter. The measures, which will also include further sanctions on state-owned Russian enterprises, government officials and their family members, are aimed at degrading key instruments of the Kremlin’s power and are meant to impose acute economic harm on Russia, the people said.

The announcement comes as pressure has been building on Western economies to ratchet up sanctions on Russia over the apparent massacre of Ukrainian civilians, which prompted President Joe Biden to repeat his accusation that Vladimir Putin is a war criminal.

The Treasury had already moved to essentially freeze Russian government assets held at U.S. institutions, but now it won’t allow Moscow to access those dollars even to meet its obligations to bondholders. Its latest payment was due Monday.

“Beginning yesterday, the U.S. Treasury will not permit any dollar debt payments to be made from Russian government accounts at U.S. financial institutions,” a Treasury spokesperson said Tuesday in a statement. “Russia must choose between draining remaining valuable dollar reserves or new revenue coming in, or default.”

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

The additional sanctions to be announced in coordination with the European Union and Group of Seven nations will impose significant costs on Russia, including more economic, financial and technological isolation, according to the people familiar with the plan. Russia’s economy is already expected to shrink as much as 15 percent this year, the Institute of International Finance has estimated.

A sanctions package proposed to member countries by the EU on Tuesday would phase out Russian coal deliveries from the bloc’s energy imports, ban Russian vessels and trucks from entering the EU and impose tougher sanctions on four key Russian banks, which would be totally cut off from the markets. However, the European plan stops short of a full ban on Russian oil imports, amid resistance from countries led by Germany.

Although the Kremlin is prevented from getting access to financing from Western markets, a debt default would complicate future efforts to rebuild Russia’s connections to the global economy.

“The U.S. Treasury has realized that they have 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 default, which will have long-term ramifications on your economy, get out of Ukraine.”

The U.S. and its allies have leveled devastating sanctions on the Russian economy since the invasion, initially sending the currency into a freefall. That sparked a furious effort by the Russian central bank to stabilize the ruble, which has rebounded in recent weeks, aided in part by a stream of Russian oil and gas revenue.

Although sanctions had severely limited Russia’s ability to pay bondholders, the Treasury had been allowing U.S. banks to process those payments, an exemption that was set to expire on May 27. That reflected a desire by the U.S. and its allies to avoid the potential ripple effects of a Russian default on the rest of the global economy, said Josh Lipsky, director of the Atlantic Council’s GeoEconomics Center.

Now, it has become clearer that Russia’s exposure to other global financial institutions isn’t likely to cause contagion in the global economy if it defaults on its sovereign debt, Lipsky said.

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

Not everyone is as sanguine about the contagion effects.

World Bank Chief Economist Carmen Reinhart last month said it is difficult to know who has investments and exposure, especially non-banks, and argued that a default could ripple across other emerging markets and institutions in ways that are hard to predict.

Either way, a default would likely have enormous consequences for the Russian economy.

Unlike the last time Russia defaulted following its 1998 currency crisis, the sanctions leveled against the country will make it extremely difficult for the government to negotiate with bondholders to restructure its debts. It also won’t be able to turn to the IMF for help, as other countries do in a typical debt restructuring.

“This is now a decades-long overhang that will be part of their economy, no matter what happens in the months and years to come,” Lipsky said. “It will affect their credit rating, it will affect their ability to access debt for years. When they do borrow, it will be at a much higher rate.”


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