After the US cut off Moscow’s ability to pay creditors today, it is on the verge of defaulting on its national debt for the first time since the Bolshevik coup more than a century ago.
The Treasury Department said in a notification that it will not renew the license that permitted Russia to continue paying its debtholders through American banks, thereby ensuring a Russian default.
The Treasury Department has allowed banks permission to execute any dollar-denominated bond payments from Russia since the first round of sanctions. The deadline is midnight on May 25th.
The US dollar is the global reserve currency and the currency in which most international trades are denominated, giving the US enormous control and leverage over international finance as US banks must process those transactions.
At the same time, the EU has proposed new rules that would make it harder for Russian oligarchs to evade sanctions and open the way to confiscating their assets to help pay to rebuild Ukraine.
‘While the Russian aggression on Ukraine is ongoing, it is paramount that EU restrictive measures are fully implemented and the violation of those measures must not be allowed to pay off,’ the European Commission said in a statement.
Several rounds of incremental sanctions placed on Russia by Western powers since the Feb 24 invasion of Ukraine have been intended to target Russia’s oligarchs and bring the the country’s economy to its knees. An international debt default just the latest blow.
However, economic sanctions are enforced very differently between the US and among the EU’s 27 member states in a regulatory ‘patchwork’ that often enables those targeted to evade their bite.
‘The violation of EU sanctions is a serious crime and must come with serious consequences. We need EU-wide rules to establish that,’ said EU vice president Vera Jourova.
The EU has unleashed five waves of sanctions over Russia’s invasion of Ukraine and is currently negotiating the final touches on a sixth round that would include a ban on Russian oil imports that would further hinder Russia’s ability to pay its debts.
Russia has so far managed to make all its international debt payments since sanctions were placed on the country, but it has done so through holdings in American banks on debt denominated in dollars.
That option is now closed off after a temporary sanctions exemption expired and Russia will owe international creditors nearly $2 billion by the end of the year.
Typical consequences for a default include being excluded from international bond markets, making it very hard for countries to borrow money, and having to pay higher interest rates on future borrowing once the offending country is ‘forgiven’ by debt markets, leading to lowered economic output for years.
On previous occasions, countries unable to pay their debts have had their international assets seized. When Argentina once again defaulted in 2014, creditors claimed a navy boat and a presidential plane.
Credit ratings agency S&P last month downgraded Russia’s debt to ‘junk’ status, saying that its decision was based partly on its opinion that sanctions ‘are hampering Russia’s willingness and technical abilities to honour the terms and conditions of its obligations to foreign debtholders’.
Answering a call made initially by Kyiv, some EU member states want the proceeds of expropriated assets to help pay for the astronomical costs of rebuilding war ravaged Ukraine.
But other member states, including Germany, have expressed fear that the measure could violate international and national laws that limit the power of authorities to seize private property.
The proposals by the European Commission are expected to be discussed by EU leaders at a summit on Monday in Brussels.
Draft conclusions for the summit seen by AFP on Wednesday said leaders would support ‘further options compatible with international law being actively explored, including options aimed at using frozen Russian assets to support Ukraine’s reconstruction’.