By David Lawder

WASHINGTON, (Reuters) – A default by Russia on its sovereign debt will cause further damage to Russia’s financial system and economy, making it more difficult for Moscow to obtain new loans sources. This would also increase future borrowing costs.

According to the official, the Treasury thinks there are very few direct exposures within the U.S financial system to Russian sovereign debts. The main effect would be on a Russian economy that is already struggling under the pressure of Western sanctions.

According to the official, a default “would make it more difficult for Russia find new lenders and those who lend to Russia will require higher interest rates leading to an additional drain on Russia’s economy.”

Russia is trying to invade Ukraine more aggressively and has $117million due Wednesday for payments on its two eurobonds, dollar-denominated, that are worth $117 million. The Russian finance ministry stated that it would pay in rubles if it is prevented from doing so by sanctions – which markets will consider a default.

Western sanctions have imposed restrictions on Russia’s foreign exchange assets. They also prohibited international banks to make dollar and euro purchases with sanctioned Russian financial institution – which includes the central bank.

Wally Adeyemo, a Deputy U.S. Treasury Secretary, earlier stated to CNBC that Russia’s decisions in paying its debts would limit President Vladimir Putin’s ability continue the conflict in Ukraine.

Adeyemo stated that these choices would ultimately place Putin in a situation where he must make a decision whether to continue the invasion or stop it.

These Russian eurobonds, which mature in 2023 or 2043 respectively, were traded Monday at 20 cents per dollar. After sanctions on Russia’s invasion of Ukraine, they were the first ones to schedule payments.

According to the U.S. Treasury, the sharp fall in Russian sovereign bonds’ prices suggests a high possibility of Russian default.

The official said that investors are closely monitoring the payments due in the near future and are ready for other outcomes.