US pushes Russia to the brink of default

Russia is in imminent danger of default after the United States cut off the country’s ability to pay its debt using frozen dollars sitting in American banks.

Western countries sanctioned about half of Russia’s foreign reserves — roughly $315 billion — because of its invasion of Ukraine. Although the US Treasury had been allowing Russia to use some of its frozen assets to pay back certain investors in dollars, the Biden administration this week blocked the country from accessing its stockpiles.

That could force Russia to offer pay its debts in rubles — or not at all. Either action would constitute a default, Fitch Ratings said last month.

Treasury Secretary Janet Yellen listens during a House Committee on Financial Services hearing, Wednesday, April 6, 2022, on Capitol Hill in Washington. Yellen is telling a House panel that Russia's actions in Ukraine "will have enormous economic repercussions in Ukraine and beyond." Yellen says in prepared remarks that globally, "spillovers from the crisis" are heightening economic vulnerabilities in many countries that are already facing higher debt burdens and limited policy options as they recover from COVID-19. Yellen's appearance before the House Financial Services committee is part of her annual testimony on the state of the international financial system.

Related article Janet Yellen warns of 'enormous' economic repercussions from war in Ukraine

“Significant amounts of our reserves are blocked in foreign countries, so if this blocking continues and these transfers are blocked from the blocked amounts, then they will be serviced in rubles,” said Kremlin spokesman Dmitry Peskov in a press conference Wednesday. “If this is not possible, then, in theory, of course, a default situation can be organized.”

Peskov argued that a default would be “artificial,” because it has the dollars to pay – it just can’t access them.

“There are no grounds for a real default,” Peskov said. “Not even close.”

The United States is trying to ramp up pressure on Russia following images of atrocities committed in the Ukrainian city of Bucha. In addition to the Treasury’s decision to cut off Russia’s access to dollars, the Biden administration on Wednesday announced new sanctions on Russian financial institutions and individuals, including Russian President Vladimir Putin’s two adult daughters and the wife and daughter of Russian Putin’s foreign minister, Sergey Lavrov.

Cutting off Russia from its dollars

Treasury had been allowing Russia to use some of its foreign reserves to minimize the pain inflicted on the country’s creditors. JPMorgan estimates that Russia had about $40 billion of foreign currency debt at the end of last year, with about half of that held by foreign investors.

But the images of civilians dead in the street in Bucha led Western countries to levy more sanctions and tighten the screws on Moscow even further.

A man withdraws Russian rubles in Moscow, Russia, on March 3.

Related article Russia faces deep recession that will 'only get deeper,' Treasury official says

“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,” a US Treasury Department spokesperson told CNN in a statement late Monday.

Russia has been able to keep the ruble’s value artificially high by hiking interest rates, forcing exporters to swap foreign currency for Russian money and by demanding energy importers pay in rubles, among other actions.

That has insulated Russia’s economy somewhat from Western sanctions. But cutting off Russia from its dollars will almost certainly force it into a default. That could force Russia to make higher interest payments on its debt, if it chooses to pay.

Russia last defaulted on its domestic debt when the country was plunged into a financial crisis by a collapse in commodity prices in 1998. Its most recent foreign currency default came in 1918 when Bolshevik leader Vladimir Lenin repudiated bonds issued by the Tsarist government.

If the Russian government defaults, investors’ losses could start to mount, although Western investors have less exposure to Russia than they used to. Sanctions following the annexation of Crimea in 2014 already encouraged them to reduce their exposure. But international banks are owed about $121 billion by Russian entities, according to the Bank for International Settlements.

The interest payments due Wednesday come with a 30-day grace period. But credit ratings agencies could declare Russia to be in default before that period ends if Moscow makes clear that it does not intend to pay.

– CNN’s Chris Liakos and Matt Egan contributed to this report