(Bloomberg) -- The Biden administration is poised to fully block Russian bond payments to US investors after a deadline expires next week, a move that could force Moscow into its first foreign default in a century.
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The Treasury Department's Office of Foreign Assets Control is expected to let a temporary exemption lapse once it expires on May 25, according to people familiar with the matter. The waiver, issued shortly after the US levied sanctions on Russia over its invasion of Ukraine in February, has given Moscow room to pay coupons, helping it avert default on its government debt.
The end of the carve-out could be the final straw in Russia's debt saga after almost three months of war in Ukraine. It's managed to make all its payments to creditors so far, weaving through the tangle of sanctions that closed off some avenues.
That includes an 11th-hour escape earlier this month, when blocked payments were eventually allowed through after Moscow tapped its domestic dollar reserves. Russian corporations haven't been so fortunate, with billions of dollars of debt now in technical default.
"It is an interesting one," said Matthew Vogel, a London-based portfolio manager and head of sovereign research at FIM Partners. The move would leave Russia as "a debtor seemingly desperate to make payments, but not allowed to do so."
Finance Minister Anton Siluanov reiterated on Wednesday that Russia has no intention of defaulting on the almost $20 billion of sovereign debt it owes to foreign investors, and will pay in rubles if transfers are blocked, according to the Tass news service. In April, Siluanov pledged to sue if Russia is forced to break its obligations.
Moscow has payments equivalent to almost $500 million coming due by the end of June, though the terms of its bonds allow a portion of that to be paid in currencies other than the dollar.
Some Treasury officials had privately argued that allowing Russia to pay its debt would further drain its coffers and redirect resources that would otherwise be spent on weapons and military operations in Ukraine. But the administration has decided against extending the waiver as a way to maintain financial pressure on Moscow, the people said.
Another person familiar with the matter said that Treasury hasn't made a final decision. Spokespeople at the White House and Treasury Department had no immediate comment.
Ultimately, any impact on Russia's finances from payments to creditors is dwarfed by the money the country is earning every week on exports of oil, gas and other commodities.
"It's uncharted territory for the debt markets," Kaan Nazli, a money manager at Neuberger Berman, which has $28 billion invested in emerging-market debt. "Normally you'd have the debtor ask for holders to identify themselves and start a restructuring process. In this case it is unclear whether Russia will argue simply that there isn't much to talk about -- as it's the US Treasury blocking the payments."
Moscow's next debt transfers are due May 27, on foreign bonds maturing in 2026 and 2036. The former is dollar-denominated but allows for payment in euros, Swiss francs or sterling, as well as for interest payments in dollars to accounts in Switzerland, the U.K. or the EU.
The euro-denominated 2036 bond has an additional clause allowing payment in rubles.
But with the US bond loophole potentially gone -- and US investors effectively blocked from getting money from the Russian sovereign -- it's unclear if those clauses would be sufficient to allow the payments through to other bondholders.
Should Russia find a route, the next sovereign transfer stipulating payment solely in dollars is on June 24, when the interest on a 2028 sovereign note comes due.
"It continues to be our baseline scenario that a default will happen," said Carlos de Sousa, an investor at Vontobel Asset Management in Zurich. "I don't know why the US would renew the carve-out. Russian sovereign debt is very low, they still have resources and some money flowing in. So for them to continue to service the debt is not too onerous. The Russian government just wants to keep the reputation."
Below is a list of upcoming bond payments compiled by Bloomberg:
(Updates with Siluanov, foreign Eurobond holdings in fifth paragraph)
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