Sanctions expand as Russia nears major default

No US president ever visits Europe without a bag full of so-called ‘deliverables’ and US President Joe Biden duly arrived in Brussels on March 24-25 for the NATO and EU summits with a long list of new sanctions and related economic measures. These new US sanctions, however, were unlikely to have a major new impact on the Russian economy, as they were mostly an extension and deepening of similar sanctions announced in the first weeks after the start of the Russian invasion. from Ukraine.

For Biden’s trip, the United States announced on March 24 that it was “designating” (asset freezes and transaction/travel bans) what it called “key factors” in the invasion. This included dozens of Russian defense companies, 328 members of Russia’s State Duma and the head of Russia’s largest financial institution. The full list here: US Treasury Sanctions Russian Defense Industrial Base, Russian Duma and its Members, and Sberbank CEO | US Department of Treasury

On March 31, the United States designated 21 additional entities and 13 individuals primarily involved in sanctions busting networks to procure Western technology.

Building Allied unity in the face of the Russian invasion was a critical goal of President Biden’s trip. As a result, showing the world how well the US and EU were coordinating energy sanctions and strategies was a priority for all leaders involved. Seen in this light, the Biden Brussels ruling was only partially successful as no new EU sanctions emerged.

For its part in this show of allied unity, the EU has focused on energy measures instead of invoking a new round of sanctions. The US and EU both announced a ‘partnership’ and the creation of a high-level task force on March 25 that would work to reduce the EU’s reliance on fuels. Russian fossil fuels, but a number of European countries, including Germany, remain reluctant to announce drastic measures against Russian energy exports for fear of exacerbating existing supply disruptions that appear to be worsening. This so-called “Joint Action Plan” will increase US LNG deliveries to the EU by 15 billion cubic meters (bcum) this year.

In addition, the two sides agreed to remove regulatory hurdles to necessary infrastructure improvements on both sides of the Atlantic to allow already strained US exporters to “increase” LNG and other deliveries to the EU and to reduce a significant part of the bloc’s Russian energy dependence, but clearly not to immediately replace all of the 41% of the bloc’s gas imports that come from Russia.

The EU had agreed earlier this year to radically shift its long-term energy purchases from Russia in response to the invasion of Ukraine and buying more US-sourced LNG was a major feature. of this strategy, as well as the expansion of renewable energy production in the country.

Ultimately, EU energy imports from Russia remain the main source of hard currency that cushions, if not directly funds, Moscow’s invasion of Ukraine, especially with the high percentage of reserves of currencies that Russia held abroad currently frozen by sanctions.

Russia’s next possible default

Moscow denied President Biden his most important talking point in Brussels by narrowly avoiding default on March 17 by making the required coupon payments in dollars on $117 million of maturing debt. However, the next challenge for Moscow is fast approaching with $2.2 billion falling due on April 4. None of these debts can be paid in rubles, according to observers who have seen these contracts (note: some contracts allow small payments in rubles).

The Russian Finance Ministry took two interesting steps this week. Initially, it issued a note on March 28 indicating that full repayment of maturing debt would be made in dollars. Then, on March 29, it offered all foreign investors to redeem their foreign currency-denominated bonds in rubles at the March 31 exchange rate. It is not known how many investors accepted this offer. There are other indications that Russia may be preparing to make the expected payment, the most important being that paying agents and clearing banks continue to make small payments on other debt instruments as they expire this week.

Creditors remain divided on whether payment will be made for several reasons. The first, of course, is the payment amount which is more than ten times the March 17 payment amount. The second question is technical feasibility. The Treasury Department’s Office of Foreign Assets Control (OFAC) clarified in early March that such debt repayments will be permitted using funds that OFAC has frozen, but only until May 25. Thus, the April 4 payment, if ultimately not made, is more a political signal to demonstrate Russia’s defiance (not uncommon behavior in other sanctions programs) than a real point of economic stress data.

It is only after the May 25 deadline, designed to give financial markets time to amortize in case of default, that we can begin to postulate that Russia is struggling to generate enough hard currency to ensure servicing its debt through transactions with non-sanctioned countries.

In a similar vein, S&P Global this week downgraded Russia’s credit rating to “CC,” which is defined as “imminent default with little prospect of recovery.” Four years ago, the agency gave Russia a BBB- quality rating.

The default question is a separate question from the ongoing fight over whether Russia will stop accepting payment for its energy sales to the EU in dollars or euros and will demand rubles as payment. Both the EU and Russia took tough stances, but a compromise mechanism was being worked out whereby energy buyers pass on their normal payments in hard currency which Russia then converts into rubles internally. On April 1, Gazprombank officials issued new ruble payment instructions while other senior Russian officials indicated that ruble payments for gas could be made several weeks or even later from so that Moscow’s latest demands will not lead to an immediate halt to energy exports.

Mary I. Bruner