US Chokehold on Russia Exercised – Finally!
(NewsBroadcast.com) – After Russian President Vladimir Putin ordered his military to invade Ukraine to — as he tells the story — “de-Nazify” the leadership of the country. Nations around the world, including the United States, placed economic sanctions on the country, including its ability to move money through international banks. Now, President Joe Biden’s administration has decided to tighten the screws a little more by hindering the Russians’ ability to pay their debts.
The Brink of Default
The idea of “sovereign debt,” according to Investopedia, is the mechanism most countries use “in order to finance their growth.” It’s like a business that takes out a loan for a new project or even when a family is approved for a mortgage loan. However, instead of several hundred thousand, or even millions of dollars, a nation-state will frequently take on debt totaling in the billions (sometimes trillions). But just like an average person, countries have to pay back those debts.
One method used when a country needs a loan is to issue bonds that have pre-agreed dates for interest and principal payments to holders. Part of the legislation used by the US that authorized the sanctions against Russia included a waiver (a.k.a. license) allowing it to use certain banks to transfer funds to meet its obligations.
The Treasury Department announced that it won’t renew the current license that expired one minute after midnight on the morning of May 25, meaning that American bondholders may not get the June payment that is due to them. That means that after any legal grace period, the Russians would be legally in default on the loans just like a person fails to make their monthly mortgage.
Unlike an individual’s house, people who lend to countries cannot foreclose on them and evict the debtors — though there are many, including those within the borders of Russia, who wouldn’t mind seeing Putin sent packing. It does mean their credit rating determined by international organizations would take a huge hit that could cause future investors to shy away from loaning to them.
The Kremlin state-run news agency Tass has downplayed the move, noting that while this move affects the US, it’s still paying and intends to keep up its obligations when it comes to Eurobonds. Treasury Secretary Janet Yellen admitted the move may not have a significant impact on the Russian economy since “they are already cut off from global capital markets” and this would just continue that state of affairs.
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