Are Russian Sovereign Bonds Now Worthless?

That is the question Mitu and I discuss in the latest Clauses and Controversies episode. We were prompted by a Bloomberg story quoting Jay Newman (formerly of Elliott Associates), who expects Russia to default and points out that its international bonds lack waivers of sovereign immunity. But this doesn't mean investors can't sue. To the contrary, investors probably can convince courts in New York and other places to accept jurisdiction and enter favorable judgments. It won't be quite as easy as in cases where the bond includes a waiver of jurisdictional immunity and related provisions, such as appointing an agent for service of process, that ease the path to the courthouse. But it's certainly do-able.

The harder problem is finding attachable assets. Having a waiver of the sovereign's immunity from attachment and execution makes things much easier, but it's possible to attach assets even without a waiver, and especially so when the foreign state lacks the support of the U.S. and most other governments.

It turns out that Russia's international bonds have all kinds of interesting clauses. Some are very investor-friendly, including a super-broad pari passu clause. Some aren't investor-friendly at all, such as a very short, three year prescription clause. And others are just weird, including a clause in a subset of bonds that potentially allows the Russian government to pay in roubles. We discuss all of these in the podcast.

Maybe investors won't line up to sue the Russian government. But if ever there was an opportunity for distressed debt funds to be on the side of the angels, this is it. So perhaps this will be the assignment we give students in our sovereign debt classes to work on for the rest of the semester:

Your client is Rick Blaine, manager of the New York based hedge fund Ilsa Capital.

A few things you should know about Rick.

He is rumored to have run guns for the anti-Franco side in the Spanish Civil War.  He never drinks Vichy mineral water. And he hates thugs of all types and nationalities.

Ilsa Capital owns positions in each of the Russian Federation foreign currency/ foreign law bonds that are outstanding as of March 1, 2022. 

Rick wants to join the fight in the Ukraine but his employees have persuaded him that he can do more for the cause by increasing the financial pressure on Mr. Putin. For this he needs your counsel.

Rick assumes that the Russian Federation, in light of the painful financial sanctions being imposed on it by the EU and USA, will stop paying interest on all of its US dollar and euro-denominated bonds.

His question to you is simple — “once they default, what can we do to cause trouble?” Rick is very popular in the hedge fund industry and has assured you that once you design a strategy, Rick is more than happy (in his words) to round up the usual suspects.

Rick does not like to read lengthy documents from lawyers. Hence, please keep your memorandum to under ten pages (double spaced).