As Ed pointed out yesterday, prior to this week the sanctions freezing Russian reserves held in US banks weren’t really freezing those funds completely. Russia was still allowed to use the reserves to make some debt payments. But that changed on Monday when the US decided that would no longer be allowed.

And that left Russia with a choice. It could continue to pay its outstanding obligations from reserves of dollars that were held in Russia (where the central bank can still access them) or it could attempt to pay the debt in rubles. Today Russia announced it had chosen the latter course.

The Ministry of Finance said in a statement that it tried to make a $649 million payment toward two bonds to an unnamed U.S. bank — previously reported as JPMorgan Chase — but that payment was not accepted because new U.S. sanctions prohibit Russia from using U.S. banks to pay its debts.

Russia said it has instead transferred the funds in rubles into a special bank account with Russia’s National Settlement Depository, the country’s securities regulator. The ministry added that once the country is allowed to access foreign exchange markets — not something that will happen for the foreseeable future due to sanctions — it will decide whether to allow bondholders to convert the ruble payment back into dollars or euros.

The debts in question were specifically denominated in dollars but those debts also have a 30 day grace period. So, in theory, Russia has 30 days from Monday, which would be May 4, in which to agree to make a payment in dollars. If it fails to do so by then it would be in default.

Credit rating agencies have indicated that payments in a currency different from the one the debt was sold in would count as a default once the grace period expired. Russia’s debt payments that were due on Monday have a 30-day grace period and had no provision for repayment in any currency other than dollars. It would be Russia’s first default on foreign currency debt in more than a century…

However, the grace period is exactly what it sounds like. It’s intended to give some extra time to make debt payments. But CNN points out that there’s no necessity to stick with that timeline if Russia makes clear they have no intention of paying.

The interest payments due Wednesday come with a 30-day grace period. But credit ratings agencies could declare Russia to be in default before that period ends if Moscow makes clear that it does not intend to pay.

Russia has already said today that it believes its obligations “have been fulfilled in full.” That certainly sounds as if they have no intention of paying in dollars. So I guess we’ll have to see what the ratings agencies decided to do next. Meanwhile, Biden administration officials are predicting a return to a Soviet quality of life.

A senior administration official who briefed reporters on the latest sanctions said the combined effects of the US and EU sanctions regime has significantly reduced Russians’ quality of life and predicted that the decline would continue.

“The reality is the country is descending into economic and financial and technological isolation. And at this rate, it will go back to Soviet style living standards from the 1980s,” he said.

“Putin himself has said the sanctions will require deep structural changes to the Russian economy to deal with the new realities, including inflation and unemployment — they simply weren’t prepared for their economic fortress to crumble. and that’s what’s happened”.

Of course the problem with entering a contest of pain with Vladimir Putin is that he can and will insulate himself from the pain and really doesn’t need to answer to anyone else. It really does begin to look like we’re pushing for either an end to fighting in Ukraine or regime change in Russia.