U.S. won’t let Russia pay its debt at American banks, forcing Moscow to default or drain money from its war machine

The U.S. Treasury stopped dollar debt payments from Russian government accounts at U.S. banks, increasing pressure on Moscow to find alternative funding sources.

The move is designed to force Russia to choose between draining dollar reserves held in its own country, spending new revenue, or going into default, according to a spokesman for the Treasury's Office of Foreign Assets Control.

The change comes as a payment on the country's debt was due on Monday and is intended to increase pressure on Putin to end his invasion of Ukraine. There are accusations that Russian troops massacred civilians in Ukrainian towns.

A carve-out in U.S. policies has allowed overseas and U.S. investors to receive payments on Russian foreign-currency debt. The exemption will end on May 25.

Carl Wong, head of fixed income at Avenue Asset Management, said that it seems to him that it is a U-turn of what the U.S. government allowed when Russia paid a $117 million coupon.

Despite warnings from credit-rating companies and others, Putin's government has so far stayed current on its foreign debt obligations. Russia was able to buy back about three-quarters of the outstanding amount before the note came due, as the most recent stress test.

The latest U.S. move will intensify scrutiny on payments due May 27 for interest on euro and dollar notes due in 2036.

Russia's foreign-currency and gold reserves plummeted to just $604 billion as of March 25, the lowest level in a year. Since Russia began the invasion, it has taken a $38.8 billion drop from a February peak.

It can still receive payments for oil and gas even though it is not allowed by the U.S. and its allies.

The central bank was handcuffed after the war caused sweeping sanctions and the seizure of two-thirds of its reserves. The Governor of the Bank of Russia has acknowledged that it couldn't intervene in the market because of the curbs imposed, but she says it sold foreign currency to support the ruble.

The central bank cited interventions, foreign-exchange refinancing operations and a currency revaluation of assets as reasons for the decline in reserves.

Russia has been working to remove the dollar from its economy and financial markets in recent years.