Since the first rounds of sanctions against Putin as punishment for his invasion of Ukraine, the Treasury Department has given banks a license to process any dollar-denominated bond payments from Russia. That window will now expire at midnight on May 25th.
The United States government will block the final route for Russia to pay its billions in debt back to international investors on Wednesday, inevitably making Russia default on its debts for the first time since the Bolshevik Revolution. The Treasury Department announced that it does not plan to renew the license that allows Russia to keep paying its debtholders through American banks.
There had already been signs that the Biden administration was unwilling to extend the deadline. At a press conference heading into the G7 finance minister meetings in Koenigswinter, Germany, last week, Treasury Secretary Janet Yellen said the window existed “to allow a period of time for an orderly transition to take place, and for investors to be able to sell securities.”
⚡️US unlikely to extend Russia’s debt-payment license, increasing risk of default.
The license expires on May 25. US Treasury Secretary Janet Yellen said that the move won’t significantly change the situation in Russia, as “they’re already cut off from global capital markets.”
— The Kyiv Independent (@KyivIndependent) May 18, 2022
Without the license to use U.S. banks to pay its debts, Russia would have no ability to repay its international bond investors. The Kremlin has been using JPMorgan Chase and Citigroup as its conduits to pay its obligations. “The expectation was that it was time-limited,” Yellen said.
I thanked @vonderleyen and @USAmbEU today for their crucial leadership in this important time in Europe. We discussed critical issues related to energy security, Ukraine’s economic needs, and continued coordination to impose sanctions on Russia. pic.twitter.com/Za73wRgns9
— Secretary Janet Yellen (@SecYellen) May 17, 2022
The Kremlin appears to have foreseen the likelihood that the U.S. wouldn’t continue to allow Russia to keep paying on its bonds. The Russian Finance Ministry prepaid two bonds on Friday that were due this month to get ahead of the May 25th deadline. The next payments Russia will need to make on its debts are due on June 23. Like other Russian debt, those bonds have a 30-day grace period — which would cause default by Russia to be declared by late July, barring the unlikely scenario that the Russia-Ukraine war would come to an end before then.
OFAC not extending the general licence in Russian external debt service – Russia will be forced into default by this. https://t.co/Cta1HSZxYF
— Timothy Ash (@tashecon) May 24, 2022
Russia has not defaulted on its international debts since the 1917 Revolution, which caused the collapse of the Russian Empire and resulted in the formation of the Soviet Union. Russia defaulted on its domestic debts in the late 1990s during the Asian Financial Crisis but was able to recover from that default with the help of international aid.