WASHINGTON >> The Treasury Department is taking action to block the Russian government from making debt payments to U.S. banks with U.S. dollars, curtailing one of the strategies President Vladimir Putin uses to avoid defaults, a an agency official said on Tuesday.
Russia faces several April deadlines to repay its debt. The Kremlin must now choose between emptying its precious remaining dollar reserves, using new incoming or default revenue, said the official, who spoke on condition of anonymity because the official was not authorized to speak. publicly.
The Treasury’s decision comes after the agency previously said that sanctions imposed on Russia for its invasion of Ukraine still allow Russia to continue paying down its debt. The debt is owed to foreign investors, among others, and stems from government investments presumably intended to stimulate economic growth in Russia.
Russia is currently facing soaring inflation, shortages of essential goods and disrupted trade with the rest of the world as it continues its invasion of Ukraine.
As the ruble rebounded from the fall it suffered after US and European allies decided to bury the Russian economy, Putin resorted to extreme financial measures to ease sanctions from the West and inflate his currency.
Western sanctions from the war imposed severe restrictions on banks and their financial transactions with Russia, and also froze much of the government’s foreign currency reserves.
The West has cut off major Russian banks from a financial messaging system known as SWIFT, which is used every day to move billions of dollars between more than 11,000 banks and other financial institutions around the world. Sanctions have been imposed on Russian leaders, oligarchs, trade and natural resources, as well as the country’s central bank.
The US, EU and UK have limited Russia’s central bank’s ability to tap into more than $600 billion in foreign exchange reserves and have frozen its gold reserves. This left the central bank with few tools to support the ruble and prevent it from collapsing.
The decision to limit bond payments will further drain the resources Putin is using to continue his war against Ukraine and lead to more uncertainty and challenges for Russia’s financial system, the treasury official said.
Darshak Dholakia, a business and government regulations attorney in Washington, said that now that the Treasury has restricted access to those funds, “it looks like the math has changed.”
He said the United States was finding ways to ensure that Russia had less money to buy weapons by reducing its access to funds to pay its bond obligations.
“The United States has yet to impose comprehensive central bank lockdowns,” he said. “They say Russia can’t touch those funds unless it’s for an authorized purpose.”
Once a country defaults, it may be cut off from borrowing in the bond market until the default is resolved and investors regain confidence in the government’s ability and willingness to pay. In addition, bondholders could suffer heavy losses and sue.
The Russian government can still borrow rubles at home, where it relies primarily on Russian banks to buy its bonds.