The United States has not found a legal mechanism to seize the assets of the Russian Central Bank for the purpose of funding Ukraine’s reconstruction. This point was echoed by US Treasury Secretary Janet Yellen during a press briefing.
She stressed that such a move would not be legal under US law. Since Russia began its military operation in Ukraine, the US and its European partners have frozen more than 300 billion dollars in assets held by the Central Bank of Russia.
Yellen noted that Washington has discussed ways to press Russia to contribute to the costs of the damage and reconstruction in Ukraine. She argued that given the scale of destruction and the substantial aid required, it would be reasonable for Moscow to participate in the burden of paying for some of the harm caused by the conflict.
She also indicated that sanctions relief for Russia to service its foreign debt or redeem bonds is unlikely to be extended. Licenses that permit such activity could expire, with a real chance they will not be renewed.
In March, the US Treasury issued a license allowing limited exceptional transactions with the Bank of Russia, the National Wealth Fund and the Russian Treasury. These transactions would be permitted if needed to receive interest, dividends or payments tied to existing debt or stock. However, new securities could not be purchased by Americans, and debt obligations must have been issued before March 1.
What is a country’s foreign debt?
Public foreign debt arises when a government borrows from external creditors such as other states or international organizations. Russia has notable lending relationships, with Belarus being a significant lender among the partners. Other major lending partners include nations such as Bangladesh, Venezuela, India, Vietnam and Yemen.
Private investors can also lend to a country by purchasing government bonds in foreign currencies on international markets. These eurobonds represent a commitment to repay a debt in a foreign currency, which may not be limited to euros.
Historically, Russia’s external public debt has been comparatively modest. As of early April, it stood around 26.5 billion dollars, a decline from January. Foreign investment accounts for about one-fifth of Russia’s public debt, roughly three trillion rubles. The value of a country’s total debt is not a sole indicator of economic health; it should be weighed against broader metrics such as GDP. The World Bank has flagged debt levels above 77 percent of GDP as a major risk; Russia’s debt-to-GDP ratio has hovered well below that threshold in the past decade.
How do sanctions on Russia’s foreign debt operate?
The United States has methodically tightened restrictions on Russian public debt. Initial steps in 2019 barred US investors from purchasing Russian eurobonds on the primary market. In the spring of the following year, the primary market for Russian government bonds issued in rubles faced prohibitions. After President Vladimir Putin’s recognition of the LPR and DPR, February saw a ban on purchases of Russian government bonds in any currency on the secondary market. The aim, stated by US officials, was to cut off Western funding for the Russian government and curb new debt issuance in Western markets. The Central Bank of Russia and other financial institutions have said they have clear action plans for responding to various scenarios.
How does Russia fund its foreign public debt under sanctions?
Russia has managed to meet eurobond obligations on two occasions since the sanctions tightened. At the end of March, a payment exceeding 300 million dollars was made, with the Ministry of Finance reportedly drawing on frozen foreign currency reserves. The ministry has presented an alternative explanation, saying funds were paid from the federal budget using accounts at the Bank of Russia. In late April, a payment of 649.2 million dollars went through, with reports suggesting the funds were sourced from foreign exchange profits or domestic dollar reserves. Market observers have noted that the United States allows the use of domestic reserves to fulfill debt obligations, a move that further depletes Russia’s dollar resources. The next series of eurobond payments is scheduled for late May, with terms allowing at least one case to be settled in rubles and another possibly in a different currency.
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