State Duma reaction and debt strategies amid U.S. sanctions

State Duma reaction

The latest U.S. sanctions, which bar Russia from making payments on government debt using dollars held in frozen reserves, elicited only a restrained response from lawmakers in the State Duma.

According to public statements, the U.S. Treasury restricted Russia from servicing its national debt with funds from reserves frozen due to sanctions. In parallel, a spokesperson emphasized that Russia must choose between depleting its foreign exchange reserves and default. The Kremlin asserted that the country has sufficient funds to meet its obligations even under sanctions, noting that the measures harm the United States and its citizens. The stance aligns with a broader assessment by major international financial institutions that sanction pressure weakens the dollar’s global role in settlements, a view echoed by parliamentary speakers in official communications.

Four avenues to counter the ban

The State Duma outlined four potential responses to the U.S. ban. Anatoly Aksakov, chair of the Committee on Financial Markets, indicated that foreign currency accounts held by Russian banks without Western restrictions could serve as a first channel. An attorney pointed out that funds from these non-sanctioned banks could be used to settle public debt by moving dollars through non-Western channels, thereby bypassing restrictions.

It was stated that Russia remains solvent in the eyes of Western observers. Approximately half of the country’s gold and foreign exchange reserves are abroad, with the remainder held domestically. On the debt front, a principled approach suggested that American Eurobond holders ought to bear some responsibility, highlighting a potential political angle to the financial maneuvering.

Alexei Chepa, the first vice-president of the State Duma for International Relations, proposed additional methods to counteract financial restrictions beyond leveraging non-sanctioned bank accounts. The second option involves using foreign currency accounts of non-sanctioned Russian entities to service government debt, a process that would ultimately convert the funds into dollars.

Chepa noted that several non-sanctioned Russian commercial and state-owned companies maintain foreign currency accounts that could be utilized. Accounts at Gazprombank were mentioned, though this route carries risk and requires ensuring that the currency remains within Russian borders rather than moving abroad.

This strategy would also shield Russia’s third-largest commercial bank from potential foreign account freezes and could help avoid the negative consequences of freezing central bank assets.

The third approach focuses on directing oil and gas revenues to debt service, effectively transferring Gazprom’s dollars to U.S. banks. The fourth approach involves paying public debt in rubles.

Officials stressed the need to build a financial buffer, suggesting that earnings from oil and other exports could be mobilized. It was proposed that the Ministry of Finance should continue eurobond payments in rubles where feasible.

Which option did the Ministry of Finance choose?

The Ministry of Finance reportedly selected the fourth option, paying eurobonds in rubles. The ministry indicated that eurobonds issued since 2018 could be serviced in rubles, subject to central bank arrangements. On a recent date, the ministry executed initial payments totaling 649.2 million dollars under Russia-2022 and Russia-2042 issuances.

A source cited by media outlets described the use of special C-type accounts to settle foreign eurobond holdings. These accounts are designed for non-residents engaging in foreign exchange operations, and current conditions suggest ruble-to-dollar conversions would be restricted until access to frozen assets abroad is restored.

Analysts have voiced concerns that this path introduces risk for American holders of Russian securities, potentially impacting their expected dollar payouts. Observers noted that continued pressure on Russia to honor debt obligations could influence outcomes for U.S. eurobond investors who are exposed to ruble-denominated settlements.

The exception that tests the rule

Economist Mikhail Belyaev highlighted the influence of precedent within Anglo-Saxon legal practice. Earlier in the year, Russia completed a ruble payment to a set of bonds, signaling a potential shift in how eurobonds might be treated going forward. The incident prompted discussions about whether ruble payments could become the norm rather than the exception, a move that could have political implications for leadership in the United States if it affects major holders of Russian debt.

One notable group among U.S. eurobond holders is pension funds, a broad base that includes hundreds of thousands of ordinary American citizens who may prefer not to receive payments in rubles. Policymakers and investors alike warned that continued technical debt relief on rubles could shape the political climate ahead of key elections, underscoring the high-stakes nature of debt instruments tied to Russia.