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US ends Russia’s ability to pay international investors

WASHINGTON – The US on Wednesday will close the last avenue for Russia to repay its billions in debt to international investors, making a Russian default all but inevitable for the first time since the Bolshevik revolution.

The Treasury Department said in a statement it has no plans to renew the license that allowed Russia to continue paying its debtors through American banks.

Since the first round of sanctions, the Treasury has licensed banks to process all dollar-denominated bond payments from Russia. This window expires at midnight on May 25th.

There had already been signs that the Biden administration was unwilling to extend the deadline. At a press conference ahead of the Group of Seven finance ministers’ meeting in Koenigswinter, Germany last week, Treasury Secretary Janet Yellen said the window was in place “to allow a period for an orderly transition and for investors to sell securities.”

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“The expectation was that it was temporary,” Yellen said.

Without a license to use US banks to service its debt, Russia would not be able to repay its international bond investors. The Kremlin has used JPMorgan Chase and Citigroup as channels to meet its obligations.

Jay Auslander, a prominent sovereign debt attorney who has previously led other debt crises like Argentina’s, said most institutional investors in Russian debt have likely sold their holdings by this point, knowing that that deadline is coming. Those still holding the debt are either distressed debt investors or those willing to wait until the courts sort them out in the next few years.

“The majority that wanted out got out. The only problem is finding buyers,” he said.

The Kremlin appears to have anticipated the likelihood that the US would not allow Russia to continue paying for its bonds. Russia’s Treasury Department on Friday prepaid two bonds that were due this month to meet the March 25 deadline.

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The next payments that Russia has to make on its debt are due on June 23. Like other Russian debt, these bonds have a 30-day grace period – which would mean that Russia would default by the end of July, barring the unlikely scenario the Russo-Ukrainian war would be over by then.

Investors have been almost certain for months that Russia will default. Insurance contracts covering Russia’s debt have been pricing in an 80% probability of default for weeks, and rating agencies such as Standard & Poor’s and Moody’s have placed the country’s debt deep in junk territory.

Russia has not defaulted on its international debt since the 1917 revolution, when the Russian Empire collapsed and the Soviet Union was formed. Russia defaulted on its domestic debt during the Asian financial crisis in the late 1990s, but was able to recover from that default with international help.

A Russian default this time is unlikely to have much of an impact on the global economy, Auslander said, as Russia has been isolated from global financial markets for months and investors have been anticipating a default. Biden officials have made similar statements.

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Once it defaults, the next likely step for Russia would be to turn to US, UK, or European courts to argue that it is being held up by circumstances beyond its control – a term in the financial world known as force majeure – was forced into default in order to restore its insolvency position on the global financial markets. However, that argument could be difficult to win, Auslander said, as Russia has been cut off from financial markets because it chose to invade Ukraine.

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Sweet reported from New York.

Copyright 2022 The Associated Press. All rights reserved. This material may not be published, broadcast, transcribed or redistributed without permission.

https://www.local10.com/news/politics/2022/05/24/us-to-end-russias-ability-to-pay-international-investors/ US ends Russia’s ability to pay international investors

Sarah Y. Kim

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