Russia faces increased risk of default as key US sanction exemption expires in May – Yahoo Finance

Sanctions on Russia have effectively isolated Vladimir Putins country from the global economy, with the country at increased risk of not being able to pay its bills.

The major credit rating agencies have begun the process of declaring the country in default, which generally refers to a government unable to meet obligations on its debt.

The agencies add that further sanctions at the end of May will further ratchet up pressure on Russia.

On Friday, S&P Global Ratings downgraded Russias foreign currency issuer credit rating to selective default after the country failed to make U.S. dollar payments to some of its bondholders. It is the first default call among the three major credit rating agencies.

April 4 was the due date for the Russian government to make coupon and principal payments to foreign bondholders expecting to be paid in U.S. dollars. The government appeared to make the payments but in rubles.

Although Russia has a 30-day grace period to make the payments as promised, S&P Global Ratings said it was unlikely, as further Russian aggression in Ukraine fuels the expectation for more sanctions.

We currently don't expect that investors will be able to convert those ruble payments into dollars equivalent to the originally due amounts, S&P Global Ratings said in its note issued on April 8.

The ratings agencies have noted that there are further headwinds for Russias ability to repay.

U.S. investors are currently allowed to receive Russian debt payments via an exemption in U.S. sanctions, but the temporary measure is set to expire on May 25.

Photo taken on March 24, 2022 shows ruble banknotes and coins in Moscow, capital of Russia. Russia will reject U.S. dollars or euros and only accept rubles for its natural gas supplied to "unfriendly countries," including the European Union EU members and the United States, President Vladimir Putin said Wednesday. (Photo by Bai Xueqi/Xinhua via Getty Images)

After that date, U.S. residents will require a specific license to continue to receive debt repayments, which will further impair investors' ability to receive sovereign debt repayments, Moodys noted on March 22.

Last month, Moodys said there was a very high risk of a Russian default as Fitch declared that Russia appeared to begin a default-like process on its foreign-currency debt.

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The ratings agencies have all withdrawn their credit ratings on Russian entities to comply with European Union sanctions (although limited circumstances allow the publication of updates like those from S&P last week).

Since Russias invasion of Ukraine in late February, Western countries have moved to essentially unplug the entire country from the global financial system. In addition to isolating Russian banks individually, the U.S. government and its allies cut off Russian firms from the international payment system (known as SWIFT).

But the most crippling measure: sanctions against the Russian central bank. The U.S. Treasury in late February blocked off the Russian central banks access to any of its assets in the U.S. Doing so harms the governments ability to defend the Russian ruble from rapid devaluation.

Although this shouldnt affect the Russian governments ability to pay domestic bondholders in rubles, blocking the country off from access to U.S. dollars makes it far more difficult to meet payments on bonds issued in foreign currency as the ones due on April 4 are structured.

Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.

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Russia faces increased risk of default as key US sanction exemption expires in May - Yahoo Finance