The Treasury Department blocked Russia from using dollars held at U.S. banks to service its debt, increasing the odds of Moscow defaulting on its sovereign financial obligations.
The move, which came Monday night, is intended to deplete the Kremlin’s resources for its bloody invasion of Ukraine and cut Russia off from its over $600 million reserves in U.S. banks that it was previously allowed to use to service its international debt, according to the Treasury.
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“Beginning yesterday, the U.S. Treasury will not permit any dollar debt payments to be made from Russian government accounts at U.S. financial institutions,” a Treasury spokesperson said, according to Politico. “This will further deplete the resources Putin is using to continue his war against Ukraine and will cause more uncertainty and challenges for their financial system.”
Shortly after the war broke out, the United States moved to freeze Russian foreign currency assets in U.S. institutions. But the Treasury previously allowed Russia to pay off its international debts with its foreign reserve holdings on a case-by-case basis despite the sanctions, CNBC reported. That exemption was slated to expire on May 25 but has now been voided by the Treasury’s recent move.
Now that it is cut off from its dollar holdings in the U.S., Russia will likely either have to tap into its domestic dollar reserves or default on payments owed in the U.S. dollar.
“Russia must choose between draining remaining valuable dollar reserves or new revenue coming in, or default,” the spokesperson added.
So far, Russia has managed to stay current with its sovereign debt obligations, despite hefty sanctions from the West. Russia’s most recent debt payment was due Monday and entailed a $552.4 million principal payment and an $84 million coupon payment, CNBC reported.
Prior to the war, Russian President Vladimir Putin went through great lengths to reduce Russia’s sovereign debt load and diversify its foreign currency holdings to safeguard against possible sanctions as part of the so-called Fortress Russia strategy.
Putin’s fortress has seemingly failed to shield Moscow from the West’s wrath. Russia had nearly $640 billion worth of foreign reserves before the invasion took place. Over half of those reserves have now been frozen by Western sanctions, according to Reuters.
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The last time Russia defaulted on its debt was in 1998, but the country has not defaulted on its sovereign debt since the 1918 Bolshevik Revolution.
Western nations have continued to search for ways to increase the economic squeeze on Russia for its invasion of neighboring Ukraine. They have issued a bevy of sanctions, cut Russian banks off of the SWIFT payment system, seized yachts from Russian oligarchs, and more. All of this has caused the Russian economy to plummet, with many forecasts predicting its GDP will contract somewhere between 10%-15% this year as a result.
