The Biden administration is expected to begin blocking Russia from paying US bondholders next week, raising the likelihood of Russia’s foreign debt defaulting for the first time in more than a century.
An exemption from US sanctions has allowed Russia to continue to pay its debts since February. The exemption expires on May 25.
The decision not to renew the exemption came after the Treasury and State Department analyzed what would happen if Russia defaulted and determined it would have no significant economic impact, according to a person familiar with the deliberations.
The plan to drop the carve-out was previously reported by Bloomberg News.
A default would deal a symbolic blow to Russia, which has continued to pay bonds despite sweeping sanctions that have immobilized half of its foreign exchange reserves. Russia has tried to pay dollar-denominated bonds in rubles and has threatened to file lawsuits to avoid default.
Russia has bond payments due on May 27 and June 24. It’s not clear whether it has additional tools to make them meet the restrictions in place, which would prohibit Americans from receiving interest, dividend or maturity payments on Russian debt.
Treasury Secretary Janet L. Yellen said last week the consequences of Russia’s default are still being studied.
“This is something we are currently actively investigating,” Ms Yellen said during a Senate Banking Committee hearing. “We want to make sure we understand what the potential consequences and spillovers would be if the license were to expire.”
She added: “We are actively involved in an assessment of the risks and impact of not renewing the license.”
Some finance ministry officials have argued that the debt-payment exemption was a useful way to help drain Russia’s resources. However, the Treasury Department ultimately determined that the remaining dollar bond payments did not represent a significant amount, said the person familiar with the decision.
The economic consequences of bankruptcy for Russia and the world can be relatively small.
Economists estimate that Russia’s total foreign government debt is about $75 billion, while Russia’s annual energy sales are worth about $200 billion. Investors have been anticipating default since late February and policymakers have suggested that default poses no threat to the stability of the financial system.