U.S. Sanctions Will Force Russia into Default on Foreign Debt Held Mostly by U.S. Investors

– K.C. Adams –

The U.S. is becoming increasingly irrational. It is now lashing out at Russia for daring to defy its global hegemony. The trade and financial sanctions it has imposed on Russia are spreading economic disruption throughout the world including even in the United States.

The U.S. Treasury Department's Office of Foreign Assets Control scrapped a temporary exemption on Russia's debt payments when it expired on May 25. The waiver allowed Russia to keep up government debt payments to those within the control of the U.S., which accounts for about $40 billion of its international bonds.

The extra-territorial nature of U.S. financial sanctions on Russia means that any bank or other institution having any dealings or holdings within the U.S. itself or with U.S. institutions anywhere in the world must abide by the sanctions or be punished with fines and other actions. This has angered many investors in Russian debt even those within the U.S. sphere of control.

Despite the U.S., UK and EU freezing over $300 billion of Russia's foreign currency reserves, Russia has so far managed to service all its debts and is organizing alternate ways to continue to do so with those who are willing. A $490 million foreign-currency bond payment is due at the end of June and a further $1.5 billion by the end of the year. "The 24th June bond is paid offshore and so without (the U.S. Treasury) General License 9C will presumably not be able to be made," wrote Jonny Goulden at JPMorgan.

Russian authorities say they will definitely pay all those who are not directly ensnared within the sanctions imposed by U.S.-controlled states and their financial institutions. Many in Europe are seeking exemptions to avoid the self-imposed crisis of a technical default on the Russian debt and restrictions on trade. Others including the BRICS grouping of countries (Brazil, Russia, India, China, South Africa) have already fashioned alternate international payment systems to the U.S.-controlled institutions such as SWIFT.

Scrapping the exemption on servicing Russia's debt has put a block on debt-servicing payments going to U.S. investors. Russian Finance Minister Anton Siluanov said the country will service its external debt obligations in Russian rubles if the United States blocks other options. The country will not declare itself in default. Whether those in control allow the debt to be serviced in rubles is their decision but Russia will not consider itself in default and will continue normal financial dealings with friendly countries, the Finance Minister said. Most countries and investors have said they will view a technical default of Russia's foreign debt as "artificial" with some even suggesting it would look more like a real default of the U.S.-dominated global financial system.

"The Russian economy is already under heavy sanctions, so the immediate consequences of the default will probably mean not much to the economy," said Alexey Bulgakov of Renaissance Capital. This comment from one of the world's largest investment cartels reveals the weakening of U.S. global hegemony.

According to Bloomberg, some friction has emerged within the U.S. ruling elite, with certain Treasury officials insisting that Russia should be allowed to pay its debt as failure to do so would largely fall on U.S. investors -- a classic example of cutting off your nose to spite your face. In response to the rumblings of discontent, U.S. Treasury Secretary Janet Yellen is reported to have said that the Treasury Department was still "analyzing the potential consequences of the decision."

Russia has made all its scheduled payments to creditors since the U.S.-imposed sanctions began, with Russian officials repeatedly stating the country is well-equipped to continue doing so. Russia's total foreign debt was only $65 billion as of December 2021 with government debt at about $250 billion, which is small by international standards. In comparison the U.S. public/government debt in 2018 was around $16 trillion and intragovernmental debt another $5.7 trillion. Foreign governments and institutions held around $7 trillion of the U.S. government debt. Total annual servicing charges on U.S. government debt is approaching half a trillion dollars with around 37 per cent going abroad.[1]

According to Russia's central bank, total exports reached $489.8 billion last year. Of that, crude oil accounted for $110.2 billion, oil products $68.7 billion, pipeline natural gas $54.2 billion and liquefied natural gas $7.6 billion. Return on exports will likely firm or even increase as prices for energy, grain, fertilizer, minerals and other commodities Russia sells in abundance have continued to climb, mainly because of U.S./UK/EU sanctions on Russia's trading relations. Most countries outside the U.S./NATO military bloc and even some inside are defying the sanctions. Russia is finding buyers for its exports in Asia, Africa, South America and elsewhere to replace those from what it calls "unfriendly countries" engaged in economic and proxy warfare against it.

This article was published in
Volume 52 Number 6 - June 5, 2022

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