In a significant development, US Treasury Secretary Janet Yellen said, the United States does not have the legal authority to seize frozen assets of the Russian central bank following its invasion of Ukraine.
She also said, it is likely that the special license granted to allow Moscow to make payments to its U.S. bondholders would not be extended when it expires next week, leaving Russian officials a fast-narrowing window to avoid its first external debt default since the 1917 Russian revolution.
Russia’s February 24 invasion of Ukraine will be central agenda for the Group of Seven finance ministers, who will be meeting later this week, with Yellen calling for an increase in financial support for Ukraine.
According to an estimate from the World Bank, Ukraine is suffering $4 billion in weekly physical damage from Russia’s denazification and demilitarization efforts.
“I think it’s very natural that given the enormous destruction in Ukraine, and huge rebuilding costs that they will face, that we will look to Russia to help pay at least a portion of the price that will be involved,” said Yellen ahead of this week’s meetings.
A few European officials have advocated that the EU, the US and other allies seize nearly $300 billion in Russian central bank foreign currency assets frozen by sanctions which are held abroad, but continue to remain under Russian ownership.
“While we’re beginning to look at this, it would not be legal now in the United States for the government to seize those” assets, Yellen said. “It’s not something that is legally permissible in the United States.”
The Ukraine Russia war has increased the pace of de-dollarization and U.S. Treasury officials opine that seizing frozen Russian assets will not only set a wrong precedent but increase the pace of erosion of confidence that countries have in holding their central bank assets in the United States.
DEFAULT RISKS for RUSSIA
Russia has some $40 billion of international bonds and has so far managed to keep current on its obligations and avoid default thanks to a temporary license from the Treasury granting an exception allowing banks to accept dollar-denominated payments from Russia’s finance ministry despite crippling sanctions on Russia. The license expires on May 25, with the next major payment due that day.
Yellen has made it amply clear that the US Treasury is unlikely to extend the exemption. This could lead to a technical default if Russia then resorts to trying to pay in roubles rather than dollars as required under the bonds’ covenants.
“There’s not been a final decision on that, but I think it’s unlikely that it would continue,” said Yellen while adding that a technical default would not alter the current situation regarding Russia’s access to capital.
“If Russia is unable to find a way to make these payments, and they technically default on their debt, I don’t think that really represents a significant change in Russia’s situation. They’re already cut off from global capital markets.”