Chartbook #101 Odious Claims - on Russia's bonds

So, Russia is not defaulting after all?

As of 20 minutes ago the news is that JPMorgan processed interest payments from the Russian government. Acting as Russia’s correspondent bank, JP Morgan will pass the $117 million in coupon payments to Citigroup, who as the payment agent will distribute the money to investors.

The US Treasury signed off on the payment as not violating sanctions.

On the news, the price of a Russian dollar bond maturing in 2043 surged to 47 cents on the dollar, versus 20 cents a week ago.

47 cents on the dollar is hardly bad considering that we are perched on the edge of World War III.

But is this time to rejoice? Surely not.

If you invest in Russia to open hamburger franchises or Ikea’s stores, or to build cars, you are hoping to profit by selling daily necessities to ordinary Russian consumers, pretty much as you would anywhere else.

If you invest in Russian government debt what are you hoping to profit from?

As I argue in a piece that appeared in the Guardian earlier today, you are investing in Putin’s regime, warts and all.

As Tracy Alloway pointed out in a recent piece on Bloomberg trailing an Odd Lots conversation with Mitu Gulati, law professor at University of Virginia, the prospectus for Russian debt issued since Crimea are an itemized list of Putin’s conflicts with the West. As Gulati remarks some of the bonds seem structured so as to have clauses “in them that anticipates Russia misbehaving and sanctions being increased. It’s as if the investors are giving Putin insurance for bad stuff.”

You can read the details for two loans issued in 2020, here.

Seven pages later the section on sanctions concludes:

If you took up this offer of EUR 750,000,000 at 1.125 per cent due in 2027 or EUR 1,250,000,000 at 1.850 per cent due in 2032, you were along for the ride.

Not all the bonds have these clauses. The ones in question in recent days do no have an option for Russia to pay in rouble.

In the event of a default the FT speculated that some creditors

may actually want to quickly vote to demand immediate repayment and get court judgments from US and UK judges that allow them to try to seize overseas Russian assets, to ratchet up pressure on Moscow.

That is what really triggered my Guardian article.

Imagine a situation in which Western interests who have invested in Putin’s regime have priority in claims against Russian assets relative to other potential claimants, for instance Ukrainian victims of Putin’s aggression. Why? Because the Western interests were actual investors and thus had legal claims! It would be a staggeringly perverse situation.

Ukrainians would have to survive Putin’s onslaught, fight him to a standstill, and then go through the arduous process of peace negotiations and a reparations settlement, a hugely unlikely contingency.

Russia’s own citizens would have to brave political repression to hold anyone to account for the losses they are suffering.

Foreign direct investors in Russia are expected to simply write down their stakes.

But those who have invested directly in Putin’s regime, the foreign bond holders, may, by way of Western courts, have recourse against Russian public assets.

I’m no expert in international law like Professor Gulati. I may have the wrong end of the stick. But if this is broadly speaking correct, it is surely an intolerably perverse situation.

And it poses the question: should the fact that the $117 million in interest are currently flowing to Western investors be a cause for celebration or scandal?

Would it not be appropriate for those proceeds to be allocated to a common fund to compensate the victims of Putin’s aggression?

And should legislation not be drafted that would ensure that it is not bondholders who have the first claim on Russian assets overseas? Where this matters most is in the jurisdictions of England and New York, under whose law most international debts seem to fall.