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The Alternative Payment Currency Event Clause in Russian Sovereign Bonds

posted by Mark Weidemaier

Mark Weidemaier and Mitu Gulati

A clause in recent Russian dollar and euro currency bonds – presumably written in anticipation of the possibility of sanctions from the US or the European Union -- allows payments to be made in a currency other than Euros and US dollars under certain conditions. Russia’s 2019 bond issuances in US dollars and Euros says, for example, that the Russian Federation may, under conditions “beyond its control”, make payments in an “alternative payment currency."

“Alternative payment currency” in the US dollar issuance is defined as “Euros, Pound sterling or Swiss francs or, if for reasons beyond its control the Russian Federation is unable to make payments of principal or interest (in whole or in part) in respect of the Bonds in any of these currencies, Russian roubles."

What's unclear is what makes a reason “beyond the control” of the Russian Federation in case it finds itself "unable to pay" in the specified currency. Presumably the fact that Vladimir Putin has forbidden something does not make it beyond the control of the government; he can choose not to forbid it. But could Russia plausibly argue that it is unable to pay because of western sanctions, and these are beyond its control?

A creditor might assume (with some reason) that courts in New York or London would be skeptical of this argument. After all, the sanctions too are within Russian control, in the sense that the Russian government can get them lifted by turning its tanks around. (Even if western governments haven't said this explicitly yet.) Certainly it is the Russian invasion of Ukraine that caused the sanctions to be imposed. If a court saw the causal story in this fashion, it seems unlikely that it would interpret the contract to allow payment in rubles. So while the investor would suffer the inconvenience of a lawsuit, it would at least have a high probability of ending up with the right result.

Here is the rub. The Russian bond does not include a waiver of immunity or a clause submitting to the jurisdiction of foreign courts. These absences are incredibly rare in international sovereign bonds. However, as we talked about in our  Clauses and Controversies podcast, to the extent the bond's payment mechanisms run through New York or London, courts in these jurisdictions would probably be able to hear investor lawsuits even without the Russian government having expressly submitted to their jurisdiction. And while we can imagine other, fairly nutty scenarios--for instance, the Russian government could bring an action against investors in Russian court, asking the court to confirm that payment in rubles was appropriate--we doubt courts in most other countries would respect that judgment. Still, it's extremely unusual for investors to face uncertainty about what currency they are entitled to receive. And we're starting to see that uncertainty spill over into CDS markets.

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