Soviet Bonds Are Haunting Putin

Soviet bonds issued in 1982, Leonid Brezhnev’s final year in power, are threatening the finances of Vladimir Putin’s Russia. Investors and pensioners are pushing Moscow to honor its mid-1990s promise to account for Soviet-era pension guarantees and other liabilities, including bonds. There are no public records describing the exact number or value of the bonds sold, but the government estimates that it needs 25 trillion rubles ($785 billion) to account for what remains of the Soviet balance sheet. That liability equals almost half of Russia’s economic output and would boost government debt nearly tenfold, according to Vladimir Osakovskiy, chief economist at Bank of America Merrill Lynch in Moscow. Although Putin has stalled redemptions of Soviet bonds, most recently in April with an order to halt payments until 2015, recent international court rulings have given bondholders fresh ammunition to pursue claims.

Former Soviet states like Kazakhstan forced bond investors to accept a fraction of what they were owed shortly after the USSR dissolved, but Russia vowed to eventually make good on its debts at 1990 levels, says Boris Kheyfets, a Soviet debt specialist at the Russian Academy of Sciences’s Institute of Economics in Moscow. “This all should have been settled back in the 1990s,” Kheyfets says. “How do you assume a debt that huge? It would collapse everything immediately.”