The Biden administration imposed sanctions on Russias central bank shortly after the start of the war, but it issued a special license exempting bond payments, allowing Russia to continue to pay its loan obligations. But that license was set to expire this week, and Treasury is now saying it will not be renewed. That means American banks will not be able to process debt payments when Russia tries to make them. In total, the Russian government owes about $20 billion worth of bonds, mostly in dollars, and it owes about $500 million in interest payments over the next month, according to Gerard DiPippo, a senior fellow with the economics program at the Center for Strategic and International Studies.

This will make the likelihood of a default now significant, said Adam Smith, a partner at Gibson Dunn and a former Obama administration sanctions official. Weve never done this to an economy like this before.

Treasurys announcement represents part of a much broader financial campaign against Russia in response to the invasion. Russias economy is set to contract by as much as 15 percent as a result of the Wests sanctions, according to the White House, as the United States and its allies have targeted Kremlin elites, prevented Moscow from accessing its international currency reserves and blocked key technology imports, among other measures.

Global economic tremors complicate Western leaders Russia sanctions

Being forced into a debt default would add to the list of Russias economic black marks, although experts give different assessments of its immediate impact on the Russian economy. In Germany last week at a conference of economic officials from the Group of Seven Western industrialized nations, Treasury Secretary Janet L. Yellen downplayed the repercussions of a Russian default, pointing out that the country is already largely unable to raise funds from international creditors because of the existing sanctions and investor flight over the war.

Russia is not able right now to borrow in global financial markets; it has no access to capital markets, Yellen told reporters. If Russia is unable to find a legal way to make these payments, and they technically default on their debt, I dont think that really represents a significant change in Russias situation. They are already cut off from global capital markets, and that would continue.

Still, a Russian default would mark the enormous decline in its international pedigree. Governments issue debt to raise money, but they must meet payments on what they owe to attract international capital and ensure low borrowing costs. Although hit repeatedly by international financial sanctions since the war began in late February, Russia has to this point met its obligations to international bondholders. Some sanctions experts say failure to make those payments would cement long-term consequences for Russia, ensuring investors stay away from the country even if the war ends.

Russia is expected to try to find alternative routes to make the payments, but it is unclear if it will be able to do so. Ariel Cohen, a senior fellow at the Atlantic Council Eurasia Center and a member of the Council on Foreign Relations, said it was possible that Russia buoyed by energy sales could still find a way around U.S. financial institutions to pay bondholders. But he said he doubted the countrys ability to do so.

This shows the strategy being pursued to cripple the Russian economy and make it pay for a long time, said Mark Sobel, who previously served as deputy assistant secretary for international monetary and financial policy at the Treasury Department. Theyre going to suffer a deep recession, and the money wont come back. This default is part of that.