Update: Russia said Wednesday that it made a debt payment in rubles this week, a move that may not be accepted by Russia's foreign debt holders and could put the country on a path to an historic default. The Ministry of Finance said it tried to make a $649 million payment toward two bonds to a US bank, but that payment was not accepted because new US sanctions prohibit Russia from using US banks to pay its debts, the AP reports. Russia said it has instead transferred the funds in rubles into a special bank account. Most of the contracts governing Russia’s bonds require payment in euros or dollars, and experts say the country may soon default on its foreign debts for the first time since the Bolshevik Revolution in 1917. Our story from Tuesday follows:
The Treasury Department is moving to keep the Russian government from making debt payments at US banks with US dollars, restricting one of the strategies President Vladimir Putin is using to stave off default, an agency official said Tuesday. Russia faces several April deadlines to make debt payments. The Kremlin must now choose between draining its remaining valuable dollar reserves, using new revenue coming in, or defaulting, said the official, who spoke to the AP on the condition of anonymity.
The Treasury decision comes after the agency previously said sanctions levied on Russia over its invasion of Ukraine still permit Russia to continue to make debt payments using reserves held at US banks. The debt is owed to foreign investors, among others. Russia is currently facing skyrocketing inflation, shortages in essential goods, and disrupted trade with the rest of the world as it continues its invasion of Ukraine. While the ruble has bounced back from the fall it took after the US and European allies moved to bury the Russian economy, Putin has resorted to extreme financial measures to blunt the West’s penalties and inflate his currency.
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The decision to limit bond payments will further deplete the resources Putin is using to continue his war against Ukraine and will cause more uncertainty and challenges for Russia's financial system, the Treasury official said. Sanctions have frozen roughly half of Russia's $640 billion in gold and foreign currency reserves, reports Reuters. Once a country defaults, it can be cut off from bond-market borrowing until the default is sorted out and investors regain confidence in the government’s ability and willingness to pay.
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