One of the next big questions looming over the economic war against Russia is what will happen to its sovereign bonds. The Russian government has borrowed about $49 billion in dollar- and euro-denominated bonds and is due to pay a range of interest to bondholders in the coming months.
Why is it important: If Russia defaulted on its debt, the consequences would be different from past sovereign defaults, and investors are watching for signs that this could lead to wider market turmoil, as happened with the Russian ruble default in 1998.
- “The risk of default is real,” says George Cutrambone, head of Americas trading at DWS Group, to Axios.
- And the Russian bond market is in uncharted territory, virtually frozen. According to him, there are few buyers, and some clearing houses do not carry out transactions.
Last: A decree signed by Russian President Vladimir Putin over the weekend says that Russia can pay off foreign creditors, but only in rubles, which are rapidly depreciating, according to Bloomberg.
Big picture: Somewhat toning down systemic concerns, Russia makes up only a small fraction of emerging market (EM) indices. In the US, his bonds were held mostly by long-term emerging market mutual funds (as opposed to leveraged hedge funds), while Western banks appear to have a minimal stake in Russian assets overall.
- However, the question of market impact remains unanswered for now, Axios sources say.
And adding to the general market fluctuation, other EM defaults may accumulate.
- Government bonds of Belarus and Ukraine are trading as if they are about to default, and the economic downturn in Russia, along with higher commodity prices, could hurt others, says Mitu Gulati, a law professor at the University of Virginia who is working on sovereign restructuring. debt.
Game state: Russia’s default on its foreign bonds will depend both on the country’s willingness to pay back principal and interest as they fall due (unlikely given the West has frozen a lot of its money) and its ability to transfer payments (an open question given the sanctions) , says Lee Buheit, an experienced sovereign debt restructuring lawyer now at the University of Edinburgh.
- Defaulting on debt usually hurts a nation that defaults on its obligations. They have a badly worsening credit rating and are effectively cut off from global capital markets while they work on a deal with their creditors.
- Yes, but: Russia is already cut off from markets due to sanctions imposed by the US and its allies. And the state of open hostility (Putin called the sanctions a declaration of war) will make a deal to restructure the debt almost impossible.
How it (usually) works: When a government defaults, it negotiates with its bondholders to restructure the debt by mutual agreement. The subsequent deal often involves holders forgiving some of the debt in exchange for promises of a balanced budget and fiscal austerity, among other things.
- This can take years and can be very fraught, but it is a process that the market is familiar with.
On the other hand: If Russia defaulted on its foreign bonds, some holders could sue and try to seize or secure Russian assets abroad, even if sanctions were in place at the time, Buchheit says. They would bet that if and when assets are unfrozen due to sanctions, their litigation biases will bite.
Where is it: Some, like Jay Newman, a graduate of Elliott Management – and restructuring Argentina – say bonds are worthless.
- But but but: At some point, the vultures will probably pounce. Gulati said some distressed investors are quietly waiting for the right opportunity (read: bonds are available for pennies on the dollar) and assessing whether strategies such as aggressively chasing Russian assets will pay off.
What to watch: Next week will be one of the biggest preliminary tests of Russia’s intentions. Interest payments over $100 million are due March 16. bonds in foreign currency.