The U.S. Treasury joined the escalation against all things Russian yesterday, as a Treasury spokesman – anonymously, of course—let media contacts know that the Treasury has intervened to stop Russia’s payment on their sovereign debt, out of Russian funds seized by the U.S. Between February 24 and March 31, Russia’s foreign exchange funds, held by the U.S., have been allowed to be dispersed to Russia’s creditors—and up to five such payments have occurred, including a $447 million coupon payment on a sovereign dollar bond as recently as March 31. However, Russia moved to make a $552.4 million principal payment yesterday, and the authorities put their foot down.
If seizing the foreign exchange funds has not permanently scarred trust in the U.S. banking system, playing nuclear chicken with the bond market won’t improve that reputation. But the game is on. The anonymous Treasury spokesperson explained: “Russia must choose between draining remaining valuable dollar reserves or new revenue coming in, or default.” Russia has a total of around $40 billion in outstanding international bonds.
The U.S. Treasury, acting along with Clearstream, an international payments clearing house headquartered in London, both want to compel Russia to default. (The Treasury also holds the seized foreign exchange funds of four other nations.) If London and Washington intervene to stop dollar payments on sovereign debts, the payment system can’t be safely used and investors cannot trust the faith and credit of any nation. The dollar reserve system is doubly discredited by making foreign reserves unsafe and international payments untrustworthy. This is not a movie script.
