November 28, 2022

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There is a financial war between the United States and Russia, and Moscow is closer to default

One minute after midnight in the US on May 25, and one minute after seven in Moscow, the confrontation between Russia and the United States has become a direct confrontation on the financial front. As Janet Yellen, the US Treasury Secretary, predicted, the White House allowed the license to expire in those two months that allowed US investors – despite sanctions – to receive payments from Moscow via US and international banks with interest. or dividends or coupons on bonds held by the Central Bank of Russia, the Sovereign Investment Fund or the Ministry of Finance. The ‘escape valve’ that is now closing: making sovereign foreign debt defaults inevitable. The first, for Russia, since 1917, when the new Bolshevik government repudiated the debts of the Tsarist Empire.

The numbers are at stake

This time, in fact, things are completely different: in Moscow, which speaks of “artificial” shortening, there is no shortage of resources to fulfill obligations. Despite the $300 billion being frozen in Europe and the United States – about half of the foreign exchange reserves the central bank has set aside over the years in anticipation of this major crisis with the West – gas and oil payments to Russia continue that current prices also lead to $1 billion a day: while That foreign debt obligations due between now and the end of the year are $2 billion, out of a total of $20 billion in foreign currency debt held by foreigners. Not so much for Moscow. It is a “systematically low” number for Western banks and investment funds, according to the International Monetary Fund.

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Consequences for Moscow

Nevertheless, Russia did its best to avoid default: damage to the image would further distance the international financial system, abandon ratings already at “junk” levels and lead to higher debt costs in the future. Despite this, as Yellen coldly noted last week, Russians “are, and will remain, already isolated from global capital markets.” Most likely, default will only increase distrust in countries that are theoretically close to Moscow like China, which are deeply concerned about incurring secondary US sanctions and are very cautious in their investment decisions in Russia.

For all these reasons, in order to have additional leverage on top of all the sanctions that would push Moscow to end the war, Washington preferred to close this last channel as well, even if the statement of the Ofac (Office of Foreign Assets) control, is the office of the treasury that regulates US Government Sanctions) leaves the door open for US citizens to request a “special license to continue receiving payments”. In the administration there are also those who, on the contrary, saw in the exemption the possibility of directing the repayment of the resources of foreign investors – however limited – that were subtracted from the Russian military commitment in Ukraine.

“This is not a real dereliction, we pay in rubles”

The Kremlin will undoubtedly fight back. Since coming to power, Vladimir Putin has made the reduction of foreign debt a top priority, so as not to leave the country dependent on foreign countries that experienced it in the 90s: the rebuilding of Russian power has also passed through this.
Moscow will pass through legal channels if it is forced to violate its obligations: “We have the money and the desire to make payments,” Russian Finance Minister Anton Siluanov answered today, May 25, via Telegram. Indeed, gas and oil payments continue to flow to Russia, with current prices reaching $1 billion per day: while obligations on foreign debt due between now and the end of the year amount to $2 billion, out of a total of 20 billion foreign currency debt held by foreigners.

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