Moscow is draining its declining reserves to avoid a default

With most of its foreign currency reserves held abroad frozen by Western sanctions and inaccessible, Moscow was forced to tap its precious foreign currency reserves held domestically to avoid an official default on May 3. but had a one-month grace period to finalize those specific payments before it was officially declared in default, which it was able to do this week using new funds likely generated by continued energy exports to EU countries (oil exports to the EU currently generate just over $300 million a day for Russia, depending on prices).

Earlier, Russian Finance Minister Anton Siluanov threatened that Russia would only repay its foreign currency debt “if its foreign currency accounts were unblocked”. Russia had also unsuccessfully attempted to repay the bonds owed first in funds frozen by the US Treasury and then in rubles.

Many rating agencies decided to put Russia in the “selective default” category as of April 4. In financial parlance, a selective default occurs if a borrower defaults on its specific currency obligations, but not all of its debt.

The Russian ruble, which had initially collapsed, is now trading above its pre-war level. Compared to mid-February, it is up 5% against the dollar, and 15% against the euro (sharp decline against most world currencies in recent weeks). Another sign that complete financial pandemonism has been avoided, the Central Bank of Russia lowered its key rate on April 29 from 17% to 14%; he had gone as high as 20% to support the ruble in the early days of the war.

Western sanctions experts, including those at the United States Treasury Department’s Office of Foreign Assets Control (OFAC), have long understood that the best that can be done through financial sanctions /banking (e.g. asset freeze) is to force Russia to dip into its export earnings to cover timely foreign debt payments, thereby diverting some of these resources from military spending and other critical sectors of the economy, where the long-term impact of the sanctions will be felt.

New EU sanctions package sparks major controversy

Growing aware that their regular energy payments are funding the military campaign that has caused thousands of civilian deaths and mass destruction, EU member states and the Commission are now vying for a new set of sanctions. This EU sanctions package, the sixth, is proving to be the most difficult negotiation to date.

The European Commission’s proposal, which was announced on May 4 by European Commission President Ursula von der Leyen, will need the unanimous backing of all 27 EU countries to enter into force, and includes the phasing out the supply of Russian crude oil in six months and refined products by the end. of 2022. It also proposes to ban after one month all shipping, brokerage, insurance and financing services offered by EU companies for the transport of Russian oil. These proposals will cause significant hardship in Central European countries dependent on Russian oil, but will also hit hard countries like Greece and Cyprus, which provide a substantial amount of oil transport/refining support as well as administrative/accounting services. to Russian companies. Greek shipping companies, in particular, which manage half of the EU-registered fleet, largely (and quietly) profited from the first months of the war thanks to their willingness to transport Russian oil cargoes all over the world, whether companies based in other EU countries opted out.

Cyprus is said to have challenged the Commission’s suggested ban on providing business services, including accounting, to Russian companies.

While Germany now appears willing to suffer the consequences of new energy-related sanctions decisions, Hungarians say such restrictions would make “impossible the supply of crude oil that the Hungarian economy needs to function”. Slovakia and the Czech Republic also have major concerns because they rely heavily on the Soviet-built pipeline network to import crude oil from the Urals region, which refineries in the region were designed to process.

Correct the weak points

Correcting the weak points of any sanctions regime is considered routine when a conflict drags on. As a result, under the new EU sanctions package, Sberbank, Russia’s largest bank, would be disconnected from the Swift international banking payment system. Two other banks, the Moscow Credit Bank and the Russian Agricultural Bank would also be cut from Swift, according to the latest EU proposal which has yet to be approved. Curiously, Gazprombank will not be targeted in this phase, thus elevating its role.

The EU also plans to extend its ban to Russian broadcasters it accuses of disinformation. Draft EU proposals named Rossiya RTR/RTR-Planeta, Rossiya 24/Russia 24 and TV Center International.