[London / New York, 27th Archyde.com]-Russia’s foreign currency-denominated government bonds have been identified as default, and bondholders are facing an unusual situation. The Russian government has funds and has indicated its intention to repay it, but the situation is that it cannot be implemented due to sanctions over the invasion of Ukraine.
These government bonds are already in an unusual environment. The war launched by the issuer Russia has shown no signs of ending, and the country has been separated from the international financial system.
Below is a summary of the scenarios that investors who hold some of the Russian foreign currency-denominated government bonds with a balance of nearly $ 40 billion may face in the future.
If the debtor breaks the bond contract, the creditor can request a lump sum repayment called “acceleration”, but there are rules for invoking it.
Looking at the terms of Russian government bonds redeemed in 2026 and 36, the group holding at least 25% of the outstanding balance needs to declare a “default” reason and acceleration. This declaration allows bondholders to request repayment of their entire balance regardless of the maturity date.
However, this can be overturned if a creditor who holds “at least 50%” of the total principal amount of unredeemed bonds casts a negative vote. Similarly, the default reason declaration can be withdrawn.
Regarding the two bonds in question this time, the ownership ratios of foreign investors and domestic investors have not been clarified. The same is true for Russian government bonds in general.
＜Litigation＞
Attempts to sue Russia over government bond defaults will not be straightforward. Bond conditions are unusual and can be ambiguous. In particular, government bonds issued following Russia was denounced following the annexation of the Crimean Peninsula in 2014 and the attempted spy poisoning in Britain in 2018 are troublesome.
Bonds, for example, are subject to English law, but many bonds do not specify in which jurisdiction the dispute should be dealt with.
For this reason, according to Mitu Grati, a professor of law at the University of Virginia, “Russia will bring it to a court in Moscow, but creditors will try to sue in London or New York.”
Tatiana Orova, chief economist at Oxford Economics, says investors have plenty of time to explore options.
“Some bondholders may delay the claim to the Russian government, as the bond documents stipulate that the repayment claim will expire three years following the repayment date,” he said. ..
Dennis Franitzky, sovereign head of law firm Quinn Emmanuel, said some bondholders want to go to court “first-come-first-served”, but most bondholders will consider it. Showed the outlook.
“Everything will go in slow motion, and nothing will be settled until the hostility subsides,” said Franitsky, who has advised creditors on many sovereign debt restructurings, including Argentina.
＜Arbitration＞
Investors in legal jurisdictions where bilateral investment treaties with Russia exist may try arbitration schemes to obtain financial damage or other compensation from Russia.
Russia has such bilateral agreements with dozens of countries, including most of the European Union (EU) countries, the United Kingdom and Canada.
One of the options foreign creditors can take is to wait at least for the time being.
Since Russia’s invasion of Ukraine on February 24, sanctions and customer pressure have already caused many funds to transfer funds from Russia to other regions. Funds still holding Russian bonds were forced to write down. In any case, it can be said that the damage has already occurred.
Many asset managers may simply continue to hold bonds for the foreseeable future.
“Russian bonds have zero weight in benchmarks and prices are declining. Sanctions on the secondary market of Russian bonds will further reduce prices,” said Karl Ross, a GMO partner who holds Russian bonds. Is obvious. ” “As long as Mr Putin is in power, we can’t expect a recovery in the market, but at some point the bond should be in effect,” he said.
