US says ending Russia debt payment exemption

Washington (AFP) – The United States will end an exemption allowing Moscow to pay foreign debt held by American investors with funds held in Russia, the US Treasury said Tuesday, a move that could push Vladimir Putin's country closer to default.

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The escape clause to the drastic financial sanctions imposed on Moscow after it invaded Ukraine in late February, which allowed US banks to receive and process the payments to creditors, ends as of 0401 GMT Wednesday, two days before Russia's next debt service payment is due.

US Treasury Secretary Janet Yellen last week hinted at the move announced Tuesday, saying the exemption was put in place to allow financial institutions to adjust but that it was "time-limited."

Punishing Western sanctions on Russia have largely severed the country from the international financial system, including blocking Moscow's ability to access funds held in US banks to pay its foreign creditors.

The latest move scraps the final outlet, which was forcing Putin's government to drain its war chest of reserves to make payments.

Yellen had signaled the default was the goal, part of President Joe Biden's efforts to intensify the pressure on Putin as the war rages on.

"Russia is not able right now to borrow in global financial markets, it has no access to capital markets. If Russia is unable to find a legal way to make these payments... they technically default on their debt," Yellen told reporters last week.

The Russian government has attempted to pay in domestic currency, but many of the bonds do not allow repayment in rubles.

Increasing pressure

The government still faces a dozen debt service deadlines this year.

The next one, on May 27, is for 100 million euros in interest on two bonds: one requires payment in dollars, euros, pounds or Swiss francs only; the other can be paid in rubles.

According to reports by Reuters and The Wall Street Journal on Friday, the Russian Finance Ministry transferred funds out of the country early to make the payments and avoid default.

Nearly $400 million in interest is due in late June.

After a 15- to 30-day grace period following a missed payment, the country likely would be declared in default, further deteriorating its financial position and allowing creditors to take legal action to recover the funds.

However, Moscow is still bringing in vast amounts of cash from its energy exports, and is forcing countries in Europe to pay in rubles to avoid sanctions.

That situation could change if Europe goes through with an oil embargo, although EU officials have been discussing the issue for weeks without a resolution.

The Russian ministry said the country's foreign debt amounts to between 4.5 and 4.7 trillion rubles (around 50 billion euros, $60 billion) -- or 20 percent of the total public debt.

Russia missed payments on domestic, ruble-denominated debt in 1998 amid a broader financial crisis, but last defaulted on its foreign currency debt in 1918, when Bolshevik revolution leader Vladimir Lenin refused to recognize the obligations of the deposed tsar's regime.