US closes loophole for Russian debt payments

The US is cutting off another financial route for Russia to pay its international debts, a move that could push the country closer to default.

The US Treasury Department said it would end a waiver that had allowed US bondholders to accept payments, tightening sanctions imposed over the war in Ukraine.

Russia, which is rich from its oil and gas supplies, has the funds to pay.

It has already signalled plans to contest any declaration of default.

The country has almost $2 billion worth of payments that will be due up to the end of the year on its international bonds.

While the new rules only apply to people in the US, they will make it difficult for Russia to make payments elsewhere given the role of US banks in the global financial system.

The US had already barred Russia from using US banks to transfer payments.

In comments last week, US Treasury Secretary Janet Yellen warned the waiver for investors was likely to expire. She said the exemption had been intended to allow an "orderly transition".

Analysts have said they do not expect major ramifications from the move outside of Russia, with IMF chief Kristalina Georgieva saying in March that exposure to the holdings was "not systemically relevant".

Russia's debt was already downgraded to"junk status" by major ratings agencies in March, a move that disqualifies it from purchases by major investors, making it difficult for Russia to raise money on international markets.

Professor Philip Nichols of the Wharton School at the University of Pennsylvania said it's not clear what Western holders of Russian bonds have done in the weeks since the invasion, whether rushing to offload them or holding on in hopes the situation will eventually normalise.

A default would mark the first time Russia has failed to pay its government debt since 1998 - the economic crisis at the end of then President Yeltsin's term in office.

It would likely trigger a court case, opening up Russia to recovery proceedings from creditors.

Inside Russia, any impact would be felt only over the long term as part of the country's wider economic isolation, Prof Nichols said.

"Russia just has a lot of oil and gas and that translates into a lot of money, but in the long-run, this is part of a web of instruments that are designed to make it far, far more difficult for Russia to wage war on its neighbours," he said.

"It's going to be really interesting to see what happens," Prof Nichols said.