Russia lurches towards default as the US Treasury ends a key bond payment exemption

Russia lurches towards default as the US Treasury ends a key bond payment exemption
Russian President Vladimir Putin speaks with Finance Minister Anton Siluanov.RIA Novosti/Reuters
  • Russia moved closer to a default on Wednesday after the US Treasury let a key sanctions exemption expire.
  • The end of the carve-out means US investors are not allowed to receive payments from Moscow.

The chances of Russia tumbling into a default rose Wednesday after the US Treasury ended a key sanctions exemption, prompting Moscow to say it would pay its debts in rubles.

The Treasury decided in February to allow Russian sovereign bond payments to reach US investors, despite the tough sanctions slapped on Moscow.

But the Treasury's Office of Foreign Assets Control said Tuesday night it would let the exemption expire at 12.01 a.m. ET Wednesday.

It means US investors will not be allowed to receive bond payments from Russia without breaching sanctions.

The move further complicates Russia's efforts to pay its foreign debts. Moscow has so far kept up payments on its foreign currency-denominated bonds, despite the US in April barring the government from using money held at American banks.


In response to the exemption's expiry, Russia's Finance Ministry said Wednesday it would start to pay its debts in rubles and argued that the US is trying to force an "artificial" default.

Some of Russia's foreign-currency bonds allow payment in rubles, but many do not. Investors have taken the view that payment in rubles would be a default, if it is not allowed within the contract.

Russia is scheduled to make bond coupon payments of 29 million euros ($31 million) and $71 million on May 27. It has already transferred some of the money in anticipation of the US exemption expiring.

The euro payment can be made in dollars, British pounds, Swiss francs, or Russian rubles, according to the contracts. The dollar payment can be made in euros, pounds or francs.

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Russia has roughly $1 billion of coupon payments to make on its foreign bonds by the end of the year.

Despite the end of the exemption, Russia could still avoid officially defaulting, according to Olga Nikolaeva and Iskander Lutsko of Russian broker ITI Capital.

They said they believe the majority of Russian bondholders are now European entities, and the US Treasury's move only covers US investors.

"Russia will proceed with coupon payments, while those blocked from getting money from the Russian sovereign will not be able to meet a quorum requirement to initiate litigation as part of default procedures," they said in a note this week.

However, Timothy Ash, strategist at BlueBay Asset Management, said he thought the move was a big problem for Russia.


"Putin's invasion of Ukraine has been a disaster for Russia — likely now resulting in default," he wrote on Twitter.