As Washington casts about for ways to tighten the financial screws on Russia, the Treasury late last night announced another measure to try and isolate Moscow from the international financial system.
Per Reuters, the Russian state will no longer be allowed to make dollar debt payments from its accounts at US banks going forward. Of course, the west has already frozen hundreds of billions of dollars' worth of Russia's dollar and euro reserves held abroad (a decision that will likely backfire by pushing China, Russia, India and others to diversify away from those reserve assets, as Credit Suisse's Zoltan Pozsar, the IMF's Gita Gopinath and even Vladimir Putin himself have already warned).
The most recent stress test came when a $2 billion dollar bond matured Monday, although Russia was able to buy back about three-quarters of the outstanding amount in rubles before the note came due. These latest restrictions will likely disrupt a coupon payment on a 2042 bond that was due Monday, which the Treasury has yet to approve (the payment is set to be handled by JPM's correspondent bank).
Washington appears to have used Russia's alleged massacre of civilians in Bucha to justify the decision to tighten financial sanctions.
According to a spokesperson for the Treasury’s Office of Foreign Assets Control, the decision is intended to force Russia into either draining its domestic dollar reserves or spending new revenue to make bond payments, or else go into default.
This "increases the risk of default, not because of lack of money," said Lutz Roehmeyer, chief investment officer at Berlin-based Capitulum Asset Management. "The new sanction will cause technical issues with regard to the settlement systems, so it is now an open question how Russia will construct the payment routes."
Although billions have been seized by western governments due to the sanctions, Moscow has managed to blunt their impact by diversifying its reserves away from dollars and euros.
Russia's dollar-denominated bonds tumbled on the news. However, while the new Treasury restrictions will make payments more difficult, they won't be impossible, Bloomberg reports.
Richard Briggs, a money manager at GAM Holdings in London, said the latest move makes sovereign payments “more challenging,” but the exemption means they’re still possible.
"That being said, it’s fast moving, and they could change those restrictions and effectively force a default earlier," he added.
Investors will now turn their attention to foreign-currency coupon payments due next month on bonds that are set to come to due in 2026 and 2036.
Despite widespread warnings from Wall Street and the credit-rating firms, the middle of last month came and went, and the Kremlin still managed to make payments on its foreign-currency debt. Still, banks have done everything in their power to disrupt this by slowing Russian interest payments with a series of careful checks to ensure no sanctions are being violated.