Russia on brink of historic default as US payment license expires

RUSSIA was pushed closer to the brink of a historic debt default yesterday as the United States closed the last venue for Moscow to pay its billions in debt back to international investors, as Washington ramps up pressure on the country following its invasion of Ukraine.

The U.S. Treasury Department said on its website late on Tuesday it would not extend the license, which was set to expire at 12:01 a.m. ET (4:01 a.m. GMT) yesterday. The license allowed Russia to make interest and maturity payments on its sovereign debt to U.S. persons.

That waiver has allowed Russia to keep up government debt payments, but its expiry now appears to make default inevitable – the country’s first major one on international sovereign bonds in more than a century.

Almost $2 billion worth of payments on Russian international bonds fall due before year-end.

Western sanctions imposed after the Kremlin’s Feb. 24 invasion of Ukraine, and countermeasures from Moscow, have complicated the movement of money across borders, yet Russia has made a conscious effort to keep paying bondholders. “If the bondholders don’t get their money when the money is due, factoring in any grace periods that apply, Russia will be in default on a sovereign debt,” said Jay Auslander, a partner at law firm Wilk Auslander. “With the waiver gone, there seems to be no way for bondholders to get paid.”

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

On Friday, Russia had rushed forward payments on two international bonds – one denominated in euros and one in dollars – a week before the due date.

But its dash to get the money into creditors’ bank accounts ahead of the waiver’s expiry might not have left enough time for what is often a multi-day and complex payment process.

One Asia-based bondholder said the payment had not arrived in the firm’s account by yesterday.

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

The country’s $40 billion of international bonds have come under the spotlight in recent weeks as debate raged over whether or not to extend the license.

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

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

Unlike in most default situations, Moscow is not short of money. Debt repayment dues pale in comparison to oil and gas export earnings – in April alone, soaring energy prices enabled Russia to reap $28 billion in revenues.

Russia’s most senior lawmaker on Tuesday told the lower house of parliament to study the possibility of stopping the servicing of foreign debt, saying voters were unhappy that Moscow was continuing to pay while its national reserves held abroad were frozen.