Treasury Secretary Janet Yellen announced that it is “reasonably likely” that the license for Russia’s debt may be allowed to expire on May 25th. The US has been licensing specific countries’ ability, under the current Western Union non-sanctioned regime, but with possible future restrictions due in place from June 26th forward following Russian intervention into Ukraine, which led several eastern European nations including Poland seeking greater autonomy within Europe over security matters.
Russia has enough money to pay its debts, but it’s been unable to access about $315 billion in foreign reserves due to an imposed economic sanction from the West. However, with help from other countries and international organizations like OPEC or China who have refused payments on their Treasuries holdings. There was no alternative option left for Russia when they were faced with potential bankruptcy at least until now, thanks mostly because Janet Yellen spoke out against such actions which might lead us into another Great Depression.
Russia has continued to pay its creditors without accessing those frozen assets. The country’s finance ministry said in April that Russia made a payment on $565 million Eurobond due this year, as well as an additional installment of approximately 84 million dollars for another bond set to mature by 2024 which were both paid out in US Dollars according to contract stipulations with no problems found so far at customs. The news was announced last week but since then there have been questions raised about whether or not all payments will be taxed because some proceeds may contain interest earnings.
The expiring carve-out is a risk to Russian stability because it will effectively block them from paying their US bondholders.
The US has introduced new sanctions that ban transactions with Russia’s central bank, finance ministry, and national wealth fund. However, the Treasury Department recently issued a license for some debt payment-related business which allows it to go on as before in order “to avoid any adverse impacts on critical foreign currency flows.
“Sanctions have been a big problem for the Russian economy, but I’m not too worried about this being an issue,” said Federal Reserve Chair Janet Yellen during her testimony before Congress. “We had expected that they would end eventually and when it did most investors were able to sell their investments.”
“Russia is not able to borrow right now in global financial markets. It has no access to capital markets,” Yellen said, adding that if they were unable “to find a legal way” for the payments and technically defaulted on their debt then this wouldn’t represent a significant change within Russia’s situation as it is cut off from all previous borrowing efforts anyway-the country had been isolated since its economic crisis began back in the fall of 2018.
Russia has spent the last several years trying to prop up its ruble. They’ve done this by hiking interest rates, preventing Russian brokers from selling securities held by foreigners and demanding payment for gas deliveries in rials – even as global sanctions continue to bite!
The outlook for Russia is not optimistic. They are facing a looming risk of default and squabbles with European countries over gas payments, which could limit their ability to prop up the value of the ruble against international competition in any way that would be sustainable for the long term.
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