Sanctions are being extended as Russia moves towards greater default

No American president travels to Europe without a so-called “deliverable” bag, and US President Joe Biden arrived in Brussels on March 24-25 with a long list of new sanctions and related economic measures for the NATO-EU summit. The new US sanctions, however, do not have a major impact on the Russian economy, as they were largely an extension and deepening of similar sanctions announced in the first weeks after Russia’s invasion of Ukraine.

For Biden Travel, the United States announced on March 24 that it was “determined” (the accumulation of assets and the transaction / travel ban) which it called the “key enabler” of the attack. These included dozens of Russian defense companies, 328 members of the Russian State Duma, and heads of Russia’s largest financial institutions. The full list is here: U.S. Treasury sanctions on Russia’s defense-industrial bases, the Russian Duma and its members, and Sberbank CEO | US Treasury Department

As of March 31, the United States has nominated an additional 21 organizations and 13 individuals to be involved in the Western Technology Initially Prohibition Evasion Network.

The purpose of President Biden’s visit was to strengthen allied unity in the face of Russian aggression. Accordingly, showing the world how well the United States and the EU are coordinating sanctions and energy strategies was at the top of the agenda of all the leaders involved. The Biden Brussels stop seen from this perspective was only partially successful as no new EU sanctions emerged.

In order to participate in this show of allied unity, the EU has focused on the energy system instead of calling for a new round of sanctions. Both the United States and the EU announced on March 25 the establishment of a “partnership” and the establishment of a high-profile task force that would work to reduce the European Union’s dependence on Russian fossil fuels, but several European countries, including Germany, remained reluctant. Russia’s announcement of tough measures against energy exports seems to be deepening fears of disrupting existing supplies. This so-called “joint game plan” will increase US LNG deliveries to the European Union by 15 billion cubic meters (bcum) this year.

In addition, both sides agreed to remove regulatory barriers to the necessary infrastructural improvements on both sides of the Atlantic to enable already under pressure U.S. exporters to “rise” LNG and other supplies to the EU and reduce a significant portion of Russian energy dependence on the bloc, but apparently from Russia. The entire 41% of block gas imports will not be replaced immediately.

The EU agreed earlier this year to drastically remove its energy purchases from Russia in response to the Ukraine invasion, and buying more US-based LNG was part of that strategy, along with expanding renewable energy production at home.

In the end, the EU’s fuel imports from Russia remain the largest source of hard currency that did not directly finance Moscow’s invasion of Ukraine, especially because of the large percentage of Russia’s foreign exchange reserves currently stuck abroad due to sanctions.

Russia’s next possible default

Moscow has denied President Biden his most important Brussels talking point, by narrowly avoiding default on March 17 by paying the required coupons for a mature loan of 7 117 million. However, the next challenge for Moscow is fast approaching the $ 2.2 billion arrears on 4 April. According to observers who have seen these agreements, none of these loans can be repaid in rubles (note: some agreements allow small rubles to be paid).

Russia’s finance ministry has taken two interesting steps this week. Initially, it issued a note on March 28 stating that the full repayment of the mature loan would be made in dollars. Then on March 29, it made an offer to all foreign investors to repay their foreign exchange-denominated bonds in rubles on March 31 at the exchange rate. It is unknown at this time what he will do after leaving the post. There are other indications that Russia may be ready for the scheduled payments, the most important of which is that lending agents and clearinghouse banks have continued to make smaller payments on other loan instruments since this week.

Creditors are divided on whether to pay for various reasons. First, of course, the size of the payment, which is more than ten times the amount paid on March 17. The second problem is the technical feasibility. The Treasury Department’s Office of Foreign Asset Control (OFAC) made it clear in early March that repayments of such loans would be allowed using OFAC funds, but only until May 25. Thus, the April 4 payment, if not made in the end, will be even higher. A political signal to show Russian disobedience (not unusual behavior under other sanctions programs) rather than a real economic stress data point.

Just after the May 25 deadline, designed to give financial markets time to default, can we begin to assume that Russia is having trouble creating enough hard currency for its debt services through transactions with unauthorized countries?

In a related note, S&P Global downgraded Russia’s credit rating to “CC” this week, defining it as “default imminent with little chance of recovery”. Four years ago, the company gave Russia an investment-grade “BBB-” rating.

The default question is a separate issue from the ongoing conflict over whether Russia will stop accepting payments in dollars or euros for the sale of its EU energy and will demand the ruble as a payment. Both the EU and Russia have created hard-line positions, but a compromise mechanism is probably working where energy buyers send their usual hard currency payments which Russia then covers internally in rubles.

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