The Twisted Tale of Russia’s Sanctions-Driven Default

Russia’s bond default isn’t going to follow the playbook. For one thing, there’s little precedent of a debtor -- even one at war -- that says it has the money and wants to pay bondholders, but has been blocked by a web of sanctions and frozen assets. For Russia, the default at the end of June has little immediate fallout beyond cementing its status as a pariah state in the eyes of the West after its invasion of Ukraine. For the bond market, though, it’s a watershed event, even though Russia’s $40 billion of outstanding foreign debt is small by historical comparisons. Get ready for a long, twisted tale full of potential surprises.

Typically when a payment is missed, investors band together to declare the debt immediately repayable in full, then enter into talks with the government to work out a plan. The restructuring might involve a so-called haircut (when bondholders agree to take less than face value), swapping the bonds for new notes or extending maturities. With Russia, it’s not even clear who would act as trustee to marshal the bondholders. Contracts for the securities in question, which are denominated in euros or US dollars, don’t specify one, while sanctions block a role for western institutions and complicate interactions with the syndicate banks, which are all Russian. And should investors turn to the courts, it’s not clear what venue might have jurisdiction.