Alexandra Alper, Davide Barbuscia and Karin Strohecker

NEW YORK/WASHINGTON/LONDON (Reuters) – Investors in Russia’s international bonds face an increasingly uncertain path to recover their money should Russia ultimately default, while the country itself would face increased financial isolation and hurdles to regain investor confidence.

Russia is now focused on its ability to meet its debt obligations after the sweeping sanctions imposed in response to Moscow’s invasion of Ukraine, which have frozen almost half its $640 million in gold and foreign reserve and restricted access to global payments systems.

This week, the U.S. Treasury Department stopped Russia from using foreign currency reserves at U.S. financial institution to pay its debt.

Russia was forced to find an alternative solution to paying more than $600,000,000 in sovereign debt dues. Russia placed the equivalent in roubles of these payments to bondholders in Special Accounts at Russia’s National Settlement Depository.

It is still unclear how bondholders access the funds.

“Bondholders are doing scenario planning now,” said Kenneth Rivlin, a partner at Allen & Overy’s New York office. If they’re not doing scenario planning, they should.

I believe it will be difficult for bondholders in order to recover their debts.

Rivlin stated that the transfer of money from Russia to foreign bondholders is fraught because financial institutions involved in the chain could be subject to sanctions. To proceed, they would need to hire external lawyers.

Funds from Russia to bondholders followed until now the procedure of passing through JPMorgan (NYSE ) to Citi. The U.S. Treasury stopped JPMorgan (NYSE:) from moving forward this week.

It is not small sums. JPM analysts estimated that Russia had around $79 billion in foreign debt securities last month. This includes local currency bonds and sovereign euro bonds.

Morningstar Direct data showed that large money managers like BlackRock (NYSE:), PIMCO, and Western Asset were exposed to Russian bonds prior to the conflict. PIMCO, BlackRock and other industry trackers declined to comment. Western Asset didn’t immediately reply to my request for comment.

Russia has a grace period of 30 days to make the dollar payments. If the money does not reach bondholders within this time, it will be considered default. Experts say that bondholders could sue if such a thing happens.

Benjamin Coates is a Wake Forest University history professor who studies the history and impact of economic sanctions on the economy in the 20th Century.

After Russia invaded Ukraine, February 24, sanctions were imposed that froze foreign currency reserves of the Russian central banks at U.S. institutions. The Treasury Department allowed the Russian government to pay coupon payments to dollar-denominated sovereign bonds on an individual basis.

A spokesperson for the U.S. Treasury stated that payments were allowed in order to prevent disruptions to U.S. financial markets and European financial market.

    “The first few bond payments were also relatively small, and as the payments were going to get larger, this was the right opportunity to force Russia into more difficult decisions,” the spokesperson told Reuters.

Brian O’Toole, nonresident senior fellow with the Atlantic Council’s GeoEconomics Center https://www.atlanticcouncil.org/expert/brian-o-toole and who was previously at the Treasury, said allowing the payments to be made was likely out of concern about the ripple effect from a potential Russian default.

The Treasury spokesperson added on Wednesday that the decision to block payments was part of a broader plan to ramp up pressure against Moscow and was in the works before the emergence of grim images from the Ukrainian town of Bucha after being retaken from Russian forces, where bodies of civilians shot to death had been found.

The White House’s Jen Psaki said Tuesday that Moscow could block payment from frozen reserves if they want to force Moscow into a decision “between draining valuable dollar reserves, new revenue coming in, or default”.

DEFAULT IMPLICATIONS

Elina Ribakova is deputy chief economist of the Institute of International Finance. She said Russia’s fiscal position with a surplus of $250 billion would suggest that a default of just a few billion dollars could be considered symbolic.

Russia may still face problems if there is a default, which was unthinkable prior to the invasion.

It is currently blocked from international borrowing markets by the West’s sanction, but a default means it can’t get access again until all creditors have been fully paid and any legal proceedings arising out of it are resolved.

Russia’s image in financial markets will remain tarnished even if the sanctions are lifted at some future date. It would affect Russia’s credit ratings, and raise the rates of borrowing paid by companies and the government.

“Even if sanctions are lifted, in what way will foreign investors and firms be willing to work with the Russian government again?” Coates agreed.