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New Sanctions Placed on Russia by the U.S.

In: Finance, Forex

The U.S. Treasury halted dollar debt payments from Russia’s accounts at U.S. banks. Meanwhile the country is trying to avoid a sovereign default.

Russia’s government tries to sidestep its first external default in about a century, those restrictions have hampered and delayed the process of transferring money to bond holders. The decision further complicates Russia’s attempts to keep meeting debt obligations amid the sanctions imposed after it invaded Ukraine.

The European Union is proposing to ban coal imports from Russia, which would be a major step-up for a region that’s so far shied away from targeting energy flows crucial to the bloc’s economy.

Other governments are also planning tougher sanctions after allegations that Russian troops massacred civilians in Bucha and other Ukrainian towns.

The U.S. announcement 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.

“Clearly this latest announcement by the U.S. Treasury is designed to put additional pressure on the Russians,” said Gary Kirk. “The alternative payment methods are significantly more punitive and more challenging for Russia and hence it does increase the chances of a technical default.”

Putin’s government has so far stayed current on its foreign debt obligations, despite warnings from credit-rating companies and others.  

The central bank says it’s also sold some of its foreign currencies to support the ruble, leaving questions on how long it can pull from its local coffers to pay its debts. The strong sanctions have already led to the seizure of an estimated two-thirds of Russia’s reserves.

Russia will earn nearly $321 billion this year if the commodities continue flowing. Their foreign-currency and gold reserves were about $604 billion as of March 25, down $38.8 billion from a February peak. Still, it’s reaping in huge sums from exports of energy.

But even with the funds, payments have not been smooth, with many delayed by banks doing lengthy checks to ensure they aren’t breaching sanctions.

The U.S. announcement increases the risk of default, not because of lack of money. The new sanction will cause technical issues with regard to the settlement systems, so, how will Russia construct the payment routes? it is now an open question.

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