The U.S. Treasury Department late on Tuesday it would let lapse a license which expired at 12:01 a.m. ET (0401 GMT) on Wednesday and allowed Russia to make interest and maturity payments on its sovereign debt to U.S. persons.
That waiver has allowed Russia to keep up government debt payments, but its expiry now appears to make a default inevitable on at least some its $40 billion of international bonds - Russia's first major external one for more than a century.
Western sanctions imposed after the Kremlin's Feb. 24 invasion of Ukraine, and countermeasures from Moscow, have complicated the movement of money across borders, yet Russia has made a conscious effort to keep paying bondholders.
But with almost $2 billion worth of payments falling due before year-end, it may soon run out of road.
"If the bondholders don't get their money when the money is due, factoring in any grace periods that apply, Russia will be in default on a sovereign debt," said Jay Auslander, a partner at law firm Wilk Auslander. "With the waiver gone, there seems to be no way for bondholders to get paid."
On Friday, Russia had rushed forward payments on two international bonds - one denominated in euros and one in dollars - a week before their due date.
Moscow's National Settlement Depository (NSD), where the bonds with interest due May 27 get settled, said it had received the hard currency needed to make the payment and would do so on Friday, though gave no further detail on how this would be executed.
But it is unclear if the payments will ever make their way through the plumbing of international financial markets to foreign creditors. One Asia-based bondholder said the payment had not arrived in the firm's account by Wednesday. Russia has a 30-day grace period on the two payments.
THE SMALL PRINT
The varied terms under which Russia's bonds were issued in recent years may however mean a default might not be imminent.
Russia has broadly three tiers of international bonds: legacy ones issued with offshore settlement provisions, then those issued after Moscow was sanctioned over its 2014 annexation of Crimea, which settle in Moscow at the NSD and have alternative hard-currency payment provisions. Lastly, there are recently issued bonds which settle at the NSD and also have an additional provision for payment in roubles.
The bonds awaiting payments on Friday were settleable at the NSD. In a note to clients, JPMorgan said there was some "residual uncertainty" about the transfer but that the likelihood was it had been paid.
"This then puts focus on the next two payments dates of 23rd June and 24th June," Jonny Goulden at JPMorgan wrote.
"The 24th June bond is paid offshore and so without (the U.S. Treasury) General License 9C will presumably not be able to be made." These bonds have a 15-business day grace period, Goulden noted.
Russia's finance ministry said on Wednesday it had the cash and willingness to pay, and that Moscow will service its external debt in roubles, which can be converted later into the currency of the original Eurobonds. [L5N2XH3QV]
The ministry said the U.S. decision not to extend a waiver allowing Russia to service its bonds in foreign currencies would hit foreign investors first.
Bonds are not the only flashpoint as the financial tit-for-tat ratchets up.
Sanctions imposed on Russia for launching the largest land war in Europe since World War Two include freezing roughly half of its $640 billion foreign currency reserves.
The European Union looks likely agree an embargo on Russian oil imports "within days" according to Germany.
Moscow calls its nearly three-month-old invasion a "special military operation" to rid Ukraine of fascists, an assertion Kyiv and its Western allies say is a baseless pretext for an unprovoked war.
Russian lawmakers also have a bill underway to allow the takeover of foreign companies that have exited the market there over the war.
Russia was previously rated investment-grade by credit rating agencies, but since the Ukraine conflict major ratings agencies have stopped assessing the country and it is effectively shut out of international capital markets.
"The Russian economy is already under heavy sanctions, so the immediate consequences of the default will probably mean not much to the economy," said Alexey Bulgakov, head of fixed income research at Renaissance Capital.
But a default would prevent Russia from regaining access until creditors are fully repaid and any legal cases stemming from the default are settled.
Previous debt defaults, such as by Argentina, have prompted creditors to go after physical assets such as a navy vessel and the country's presidential aircraft.
It could also throw up barriers to trade, if countries or companies that would normally transact with Russia have self-imposed rules that bar them from doing business with an entity in default.
(Reporting by Daphne Psaledakis and Rami Ayyub in Washington, Karin Strohecker and Jorgelina do Rosario in London and Emily Chan in Taipei; Editing by Jane Merriman, Chris Reese and Catherine Evans)
By Daphne Psaledakis and Karin Strohecker