Russia to choose between using its scarce dollars for debt repayment or facing a sovereign default

Helping Russia may worry foreign banks about the risk of U.S. financial sanctions

On Tuesday, the U.S. Treasury tightened the financial pressure on Vladimir Putin by prohibiting U.S. financial institutions from facilitating dollar-denominated debt payments to investors. Simply put, it made it much harder for Russia to pay its bondholders, raising the risk that Russia will default on its sovereign debt. Usually, governments that default on their debts face serious consequences. However, it is possible that Russia may be less worried about this action than other governments would be.

Russia, like other countries, borrows money by selling bonds. The bondholders provide it with money now in exchange for the promise to pay it back at a set date, paying interest along the way. The new U.S. government action doesn’t make it absolutely impossible for Russia to pay back its bondholders, but it makes it much harder. The idea is to force Russia to choose between using its scarce dollars for debt repayment (rather than other purposes), or facing the consequences of a sovereign default.

The U.S. decision means that if Russia wants to pay its bondholders, it will have to use dollars that are held outside U.S. institutions. Even that may be hard. Foreign banks may worry about the risk of U.S. financial sanctions and decide that the legal and reputational risks of helping Russia are too high for them to want any involvement.

https://www.washingtonpost.com/

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