Following Washington’s decision to end a key sanctions exemption, Russia’s chances of defaulting on its debts have increased.
The sanction exemptions ended at 12:01 a.m. Eastern time on May 25. This means that U.S. individuals and entities will no longer be able to receive bond payments from Russia without breaching government sanctions.
Though the exemption-lapse only applies to American citizens, it is expected to make things tougher for Russia as it seeks to pay other debt holders, owing to the critical role U.S. financial institutions play in the global financial system.
Russia can still avoid an official default despite Washington’s action, according to Olga Nikolaeva and Iskander Lutsko of Russian broker ITI Capital. The majority of Russian bondholders are now European entities, while the Treasury decision only applies to U.S. entities, the analysts point out.
“Russia will proceed with coupon payments, while those blocked from getting money from the Russian sovereign will not be able to meet a quorum requirement to initiate litigation as part of default procedure,” ITI Capital said in a recent note, according to Insider.
Russia’s situation is an abnormality when compared to the regular process for sovereign defaults. In such a situation, a country restructures its bonds with investors as it nears default.
“That’s not going to be feasible for Russia at this time because basically under the sanctions, nobody can do any business with them, so the normal scenario that we would see play out is not what we would expect in this case,” Solowsky said.