Here’s How Messy a Russian Bond Default Could Be

Tracy Alloway (0:05)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:10)

And I'm Joe Weisenthal.

Tracy Alloway (0:11)

Joe, did you know that I have a sort of side hobby in the history of Russian debt?

Joe Weisenthal (0:20)

I thought it was Chinese debt.

Tracy Alloway (0:21)

It's both actually. They kind of fit together for reasons that I could tell you about much later on, but it's a really interesting topic all around. And throughout history, Russian debt has, has, you know, for at least a couple of times sort of burst into the public consciousness the first time in the early 1900s with the 1918 default on czarist imperial bonds. And then in 1998 with another, I think it was a near default in the end on Brady bonds that were issued by Russia.

And now we're in another moment where it seems like everyone's gonna be talking about Russian debt yet again.

Joe Weisenthal (1:04)

Are there other holders of those early 1900 bonds who are in some obscure court somewhere trying to collect?

Tracy Alloway (1:11)

There are a lot of investors who throughout the years have tried to collect on czarist imperial debt, yes. But we have to talk about what's happening right now, which could also lead to a protracted series of litigation in various courts. But we're recording this on Wednesday, March 16th.

And it is the day that Russia is supposed to be paying about $117 million worth of interest on $2 bonds. And the question is, not only is it going to be able to pay those bonds, but what happens on other types of bonds? Is it going to pay those out in rubles?

Are those going to constitute a default? What jurisdiction could litigation actually happen in? There are so many questions swirling around this debt.

Joe Weisenthal (2:02)

Well, to me, part of the question is like, okay, we think of a country defaulting on its bonds and then it goes and it gets punished by the market in some way, it's out of the market for a long time, investors don't want to touch it. But it feels like in the case of Russia, due to the sanctions and the voluntary sanctions, it's already been cut off from the world. I mean, it's hard to imagine what is the scenario in which Russia gets more cut off from the world. Part of me is wondering even as they do pay bonds, how, given the cutoff of banks and other financial intermediaries, so how literally do you make the payment?

Obviously, there are the questions of, does Russia even have the hard currency or have the access after having lost so much access to its FX reserves? So there are all kinds of reasons why, obviously, the default is in question or the sort of question about payment, but also what does it even mean to default in this environment?

Tracy Alloway (3:00)

Right, and do the normal sort of mechanisms of push and pull actually apply?

So I'm very pleased to say that we really do have the perfect guests to talk about this. We are going to be speaking with Mitu Gulati. He's a professor of law at University of Virginia. He's also been on the show, I think, a number of times at this point and is an all-round expert in the topic of sovereign debt. We also have Mark Weidemaier. He is a professor of law at University of North Carolina. So thank you so much to you both for coming on Odd Lots.

Mark Weidemaier (3:31)

You're welcome. Thanks for having us.

Tracy Alloway (3:33)

So maybe we should just start with a big picture question. How unusual is the situation that we currently find ourselves in when it comes to Russian debt? Are there any historic parallels that we can look to? I mentioned Russia has defaulted on its debt a couple of times previously, but how much do those historic situations actually apply to the current events?

Mitu Gulati (3:59)

It is tempting to say that there aren't historical precedents and there probably isn't anything directly on point, although maybe Mark will correct me since he knows bits of this history a lot better than I do. But in the last century and the century prior, where there was lots of sovereign debt being issued, most sovereign debt was issued in order to finance wars.

And when war would break out, some countries stopped paying because they had to use the money to fight wars or they stopped paying because some of the investors were located in the country that it was fighting against. So many of the questions that we are asking today, literally today, did come up and were analyzed by the leading international law experts of the time. It's just that it was over a hundred years ago and today we've all forgotten what those answers were. And now those of us who are concerned about this are busy dredging up our really old international law books to figure out what happens in this context. But I don't know if Mark has a different read of this history.