Treasury Secretary Janet Yellen on Wednesday signaled US officials will likely end a carve-out in Western sanctions that has allowed Russia to continue make payments on its debt.
Speaking at a press conference in Germany, Yellen said it is “reasonably likely” to expect the license will be allowed to expire on May 25.
“There has not been a final decision on that. But I think it’s unlikely [the carve-out] would continue,” Yellen said.
Although the United States and other Western governments have frozen about half of Russia’s dollar reserves, the country has managed to avoid default. Russia has the money to pay its debts, but it has been unable to access its foreign reserves totaling about $315 billion.
Nevertheless, 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 a $565 million eurobond that was due this year, as well as $84 million for a eurobond that was set to mature in 2024. Both were made in US dollars, the finance ministry claimed, as required by the bond’s contract stipulations.
But the expiring carve-out would effectively block Russia from paying US bondholders, raising the risk of a default. Russia has not defaulted on its foreign debt since the Bolshevik revolution more than a century ago.
US sanctions introduced after Russia invaded Ukraine ban transactions with Russia’s central bank, finance ministry and national wealth fund. However, the Treasury Department issued a license that allows for some transactions related to debt payments.
“When we first imposed sanctions on Russia, we created an exemption that would allow a period of time for an orderly transition to take place and for investors to be able to sell securities,” Yellen said. “And the expectation was that it was time-limited.”
Yellen signaled she is not concerned about the potential spillover caused by ending the license.
“Russia is not able right now to borrow in global financial markets. It has no access to capital markets,” Yellen said. “If Russia is unable to find a legal way to make these payments and they technically default on their debt, I don’t think that really represents a significant change in Russia’s situation. They’re already cut off from global capital markets and that would continue.”
Russia has been able to prop up the ruble despite global sanctions by hiking interest rates, preventing Russian brokers from selling securities held by foreigners and demanding payment for gas and oil deliveries in rubles, among other actions. These measures have allowed Moscow to artificially manufacture demand for the ruble, even as the nation’s economy remains in tatters.
The ruble is near a five-year high against the euro and stands at a more-than-two-year high against the dollar. It’s the best-performing currency of 2022.
But Russia may not be able to maintain that strength much longer. A looming risk of default and squabbles with European countries over gas payments could limit Russia’s ability to prop up its currency.