US forcing Russia to default on debt with new sanctions

Morning In America

(NewsNation) — The United States is imposing tougher sanctions on Russia amid its invasion of Ukraine, with one that has the potential to severely impact Russia’s economy.

The United States is specifically targeting Russia’s $40 billion worth of bonds. The United States Monday stopped Russia from paying holders of its sovereign debt more than $600 million from reserves held at U.S. banks, saying Moscow had to choose between draining its dollar reserves and defaulting.

Since the U.S., will not allow Russia to use any of its frozen dollar reserves to make interest or balance payments, Russia will have to dip into its own stockpiles to pay off its debt. Since Russia isn’t allowed to get new dollars anytime soon because of other sanctions, it will eventually run out.

Russia’s ability to fulfill its debt obligations is in focus after sweeping sanctions in response to what Moscow calls “a special military operation” in Ukraine have frozen nearly half of its reserves and limited access to global payment systems.

With a total of 15 international bonds with a face value of around $40 billion outstanding, Moscow managed to make a number of foreign exchange coupon payments on its Eurobonds before the United States stopped such transactions. However, it is still likely Russia will run out of American dollars.

When Russia runs out of dollars, the Kremlin will likely default on its debts, which will lead to economic catastrophe. The last time Russia defaulted on its debt was in 1998 with inflation rising to 84%, according to reporting by the Wall Street Journal. For context, the U.S. is currently at a 7.9% inflation rate and an economic pinch is being felt by many.

J.P. Morgan, one of the processors for Russia’s debt, said the country has 30 days to make a $636 million payment it owes before it defaults on that loan.

The Kremlin said it would continue to pay its dues.

“Russia has all necessary resources to service its debts… If this blockade continues and payments aimed for servicing debts are blocked, it (future payment) could be made in roubles,” Kremlin spokesman Dmitry Peskov said.

Reuters contributed to this report.

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