• By The Financial District

U.S. Holds Key To Russia's Sovereign Default

The prospect of a Russia sovereign default is moving center stage again with a deadline for a US license allowing Moscow to make payments expiring on May 25 and $100 million in interest payments due shortly after, Karin Strohecker and Jorgelina Do Rosario reported for Reuters.


Photo Insert: The US Office of Foreign Assets Control (OFAC) issued a license on March 2 allowing for transactions between US persons and Russia's finance ministry, central bank, or national wealth fund in relation to debt payments.



Sweeping sanctions imposed by western capitals on Russia in the wake of its invasion of Ukraine on Feb. 24 as well as countermeasures by Moscow have all but severed the country from the global financial fabric.


So far, Russia has managed to navigate the plethora of measures and make payments due on seven of its international bonds since the start of the war, averting a default. But with a key license needed to transfer the funds due to expire, Moscow might be running out of road.



The US Office of Foreign Assets Control (OFAC) issued a license on March 2 allowing for transactions between US persons and Russia's finance ministry, central bank, or national wealth fund in relation to debt payments.


The license is due to expire on Wednesday, May 25. An extension by Washington seems an increasingly remote scenario. Treasury Secretary Janet Yellen said that while no final decision had been taken, it was "unlikely that it would continue."


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Those in favor of extending argue that allowing Russia to service its debt would drain its war chest by forcing Moscow to use its hard-currency revenues to make payments to creditors after roughly half of the country's $640 billion currency reserves were frozen.


Opponents of the extension point to Russia having to pay less than $2 billion on its external debt until year-end.


Government & politics: Politicians, government officials and delegates standing in front of their country flags in a political event in the financial district.

That pales compared to Moscow's oil and gas revenue, which bulged to near $28 billion in April alone thanks to high energy prices. On May 27, interest payments on two Eurobonds are due - $71 million on the dollar-denominated 2026 bond and $29 million a euro-denominated 2036 bond.


Both have provisions that payment can be made in alternative hard currencies such as dollars, euros, pound sterling, or Swiss franc, while the rouble is also listed for the euro-denominated bond.


Market & economy: Market economist in suit and tie reading reports and analysing charts in the office located in the financial district.

Switching currency can only be done if for "reasons beyond its control, the Russian Federation is unable to make payments of principal or interest" in the original currency.


The premise has yet to be tested, but experts believe it could be difficult for Russia to make that argument given sanctions were a response to its invasion of Ukraine. Both bonds have a 30-day grace period. The next payment afterward is $235 million across two Eurobonds on June 23.



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