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A default on Russia’s sovereign debt would add further pain to Russia’s economy and financial system, making it harder for Moscow to find new lending sources and raising future borrowing costs, a U.S. Treasury official said on Monday.

The official told Reuters the Treasury believes there are limited direct exposures in the U.S. financial system to Russian sovereign bonds and the main impact would fall on a Russian economy already reeling under the weight of Western sanctions.

“A default would make it increasingly difficult for Russia to find new lenders, and those who do lend to them will demand higher interest rates, leading to a further drain on the Russian economy,” the official said.

Russia, which is pursuing an increasingly destructive invasion of Ukraine, has $117 million in payments due on Wednesday on two dollar-denominated eurobonds. Its finance ministry has said it will make the payments in roubles if sanctions prevent it from paying in dollars – a move markets would view as a default.

Western sanctions have immobilized the foreign exchange assets in Russia’s central bank and prohibited international banks from dollar and euro transactions with sanctioned Russian financial institutions – including the central bank – complicating any payments.

Deputy U.S. Treasury Secretary Wally Adeyemo earlier told CNBC that Russia’s choices in how it pays its debts will drain resources from President Vladimir Putin’s ability to continue the war in Ukraine.

“Those choices will ultimately put (Putin) in a position where he has to make a decision about whether he continues the invasion or stops that invasion,” Adeyemo said.

The Russian eurobonds in question, maturing in 2023 and 2043 , traded at 20 cents on the dollar or lower on Monday. They are among the first to have scheduled payments after Russia was hit by sanctions over its invasion of Ukraine.

The U.S. Treasury official said the dramatic falls in the price of Russian sovereign bonds suggested a high probability of default.

“Investors are paying close attention to payments coming due soon and are preparing for alternative outcomes,” the official added.
Source: Reuters (Reporting by  David Lawder Editing by Chris Reese and Lincoln Feast)

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