U.S. to allow Russian debt payment license to expire

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WASHINGTON — The United States will not extend a key waiver set to expire on Wednesday that allows Russia to pay U.S. bondholders, which could push Moscow closer to the brink of default as Washington ramps up pressure on the country following its invasion of Ukraine.

The U.S. Treasury Department said on its website on Tuesday it would not extend a license, set to expire at 12:01 am ET (0401 GMT) on Wednesday, allowing Russia to make payments on its sovereign debt to U.S. persons. The waiver had allowed Moscow to keep paying interest and principal and avert default on its government debt.

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Russia has almost $2 billion worth of payments falling due up to the year-end on its international bonds.

Russia has so far managed to make its international bond payments despite Western sanctions over the Ukraine conflict and countermeasures from Moscow, which have complicated the movement of money across borders.

On Friday, Russia had rushed forward payments on two international bonds – one euro-denominated and one-dollar denominated issues – a week before their due date.

The country has $40 billion of international bonds outstanding.

There has been debate on whether or not to extend the license.

Deputy U.S. Treasury Secretary Wally Adeyemo has previously said the payments siphoned funds away from Russia’s Ukraine war effort and were a “sign of success” for U.S. sanctions policy.

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But Treasury Secretary Janet Yellen last week said Washington was unlikely to extend the license.

While the license only applies to U.S. persons, its lapse will make it very challenging for Russia to make the payment to other holders given the integral part U.S. financial institutions play in the global financial system and the complexity of such payment processes.

Unlike in most default situations, Moscow is not short of money. Russia’s debt repayment dues pale in comparison to its oil and gas revenues, which stood at $28 billion in April alone thanks to high energy prices.

WAR IN EUROPE

Washington and its allies have imposed heavy sanctions on Russia for launching the largest land war in Europe since World War Two.

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Moscow calls its nearly three-month-old invasion a “special military operation” to rid Ukraine of fascists, an assertion Kyiv and its Western allies say is a baseless pretext for an unprovoked war.

Russia was previously rated as investment grade by credit rating agencies, but since the Ukraine conflict major ratings agencies have stopped assessing the country.

If a country fails to make bond payments within their pre-defined timeframes, or specified currencies, it is seen as a default. If funds do not reach their intended recipients due to circumstances rather than inability or unwillingness to pay, this could constitute a technical default.

Russia has a 30-day grace period on the two payments due on May 27.

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Russia is already locked out of the international borrowing markets due to the sanctions, but a default would mean it could not regain access to those markets until creditors are fully repaid and any legal cases stemming from the default are settled.

Other defaults, such as in Argentina, have prompted creditors to go after physical assets such as a navy vessel and the country’s presidential aircraft.

It could also throw up barriers to trading with Russia if countries or companies that would normally transact with Russia have self-imposed rules that bar them from doing business with an entity in default. (Reporting by Daphne Psaledakis and Rami Ayyub in Washington and Karin Strohecker in London; Editing by Jane Merriman and Chris Reese)