There’s a big question over whether Russia will be able (or willing) to make payments on billions of dollars it’s borrowed from investors given its current situation. Not only does the country have a history of previous major defaults, but some of its outstanding bonds are also structured kind of strangely. On this episode of the Odd Lots podcast, Tracy Alloway and Joe Weisenthal speak with University of Virginia law professor Mitu Gulati and University of North Carolina's Mark Weidemaier. They describe how odd some Russian bonds are and what might happen after default. Transcripts have been lightly edited for clarity.
Points of interest in the pod:
Historical precedents for the current situation — 03:59
Can the assets of Russian oligarchs be seized? — 07:33
On alternative payment currency event clause in Russian bonds— 09:19
On sovereign waiver of immunity and court jurisdiction — 15:02
On why geopolitics matter for investors — 21:32
On non-traditional distribution of assets — 24:25
On pari passu in Russian bonds — 27:30
On whether Russia will rejoin the financial system — 34:34
On Ukrainian debt and whether Russia might have to assume it — 37.14
Tracy Alloway: (00:05)
Hello, and welcome to another episode of the Odd Lots podcast. I'm Tracy Alloway
Joe Weisenthal: (00:10)
And I'm Joe Weisenthal.
Tracy: (00:12)
Joe, did you know that I have a sort of side hobby in the history of Russian debt?
Joe: (00:19)
I thought it was Chinese debt?
Tracy: (00:21)
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, you know, for at least a couple times sort of burst into the public consciousness. The first time in, 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 everyone's going to be talking about Russian debt yet again,
Joe: (01:04)
Are there other holders of those early 1900 bonds who are in some obscure courts, somewhere trying to collect?
Tracy: (01:11)
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 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 two dollar 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: (02:02)
Well, to me, and part of the question is like, okay, well we think of a country defaulting on its bonds. And then 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 if they do pay bonds, given the cutoff of, you know, banks and other financial intermediaries, how literally do you make the payment? Obviously there, the questions of does Russia even have the hard currency 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 payments, but also like, what does it even mean to default in this environment?
Tracy: (03:00)
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 the 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: (03:31)
You're welcome. Thanks for having us.
Tracy: (03:33)
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? You know, I mentioned Russia has defaulted on its debt a couple times previously, but how much do those historic situations actually apply to current events?
Mitu Gulati: (03:59)
It is tempting to say that there aren't historical precedence 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. 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 that different read of this history.
Mark: (05:13)
No, I think that that's right. I think that the difference here is that we have kind of forgotten, in the modern world, just how much geopolitical tension sometimes accompanies, let's assume by the time your listeners hear this, there's been a Russian default, we've kind of forgotten how much geopolitical tension often is associated with that. And we've gotten used to thinking about private creditors and their enforcement rights and what the role of litigation is and so forth. And so in some ways what's unique about this is the combination of those two things.
Joe: (05:54)
Explain that further. I mean, you know, it's easy to think of some of the potential complications, obviously there's the sanctions, you mentioned the role of private creditors, their ability to enforce their payout. I mean, it's inconceivable, I guess, to even imagine what a jurisdiction or what court would apply it these days with the sanctions, but talk to us a little bit more about how complicated this situation is from a historical perspective.
Mark: (06:24)
Well, it's complicated in all kinds of ways. One of them is that you've got at the one point, this really tempting set of targets, Russian assets that are frozen abroad, right? Assets belonging to agents who are maybe acting on behalf of the Russian government. And yet, you know, the reality is nobody who is a creditor of the government is going to be able to find enough assets to seize and to force the sale of, and to get their claim paid in full. This is a game for patient creditors. The gamble is you can be enough of a pain in the butt to a country for long enough that it will decide it's better off paying you than it is to keep fighting. And, you know, recent historical experience suggests the Russians are plenty capable of out waiting even the most determined kinds of creditors. So the, you know, the question is whether you expect to be able to change that calculus in the near future.
Mitu: (07:33)
Can I ask Mark a question that my students have been asking me? Mark, I know you are literally the world's leading expert on this concept of veil piercing in the sovereign debt context. Can creditors -- even at a low probability estimation -- go after any of the oligarch assets? From reading your writing, this is not utterly implausible, but I haven't asked you the question. So I'm asking you here.
Mark: (08:09)
It is not utterly implausible, but one way to kind of set a baseline here is to recognize that there have been creditors -- the Yukos shareholders and others who have been doing exactly this thing -- going after Russian state-owned enterprises, going after individuals for years and years and years, on this theory that these other people were really the alter egos of the Russian government. And for the most part they have struck out. So I guess the question I would be asking myself if I were a creditor now is whether I think courts are gonna be more receptive to that argument, both because the tensions between the home states of these courts and the Russian government are so much greater, but also maybe courts are gonna be more aware of how the Russian government acts through intermediaries abroad. You know, if you think that courts are suddenly gonna get more receptive to those arguments, then you know, maybe this seems like a, a much more appealing prospect, but it hasn't had any luck so far.
Tracy: (09:19)
I want to get into a lot of these jurisdiction questions, but maybe before we do, we could talk a little bit about what Russian debt actually is and how it's structured. Because I think the country as a whole has about $150 billion in foreign currency debt. And that's issued by the government and, you know, big companies like Gazprom, but within the subset of bonds actually issued by the Russian sovereign, there are different types of debt. And this is something that the market is starting, it seems, to focus on -- the difference between certain bonds versus others. And some of these bonds have something called, you know, an alternative payment currency event clause, which a lot of people are digging into at the moment. Could you maybe explain to us exactly what that looks like and how normal it is to see those in sovereign debt?
Mitu: (10:15)
So these clauses are not normal at all. And we looked a lot at the Russian debt, Russian and Ukrainian debt at the time of the Crimean invasion at 2014. And we realized then that some of these terms, and that was debt that Russia had lent to the dictator in Ukraine at the time in order to prop him up. And we realized then that these bonds, while structured as international eurobonds have some weird clauses in them, unusual. And you guys know this market, this is a market completely dominated by boilerplate where it's just cut and paste transactions that don't take more than a few minutes. And we knew then that Russia was doing weird things. Now this alternate payments clause, I have only seen it in the recent Russian bonds, literally bonds issued after the Crimean invasion seem to have a clause in them that anticipates Russia misbehaving and sanctions being increased.
I mean it is astonishing to read the risk disclosures in these bonds. I think there's something like seven or eight pages – and Mark can correct me -- seven or eight pages talking about all the bad things that Putin has done. Invade here, you know, take over there, human rights violation somewhere else and telling investors, look, you know, there might be sanctions. And if there are sanctions, we're gonna pay in rubles. As Mark articulated it to me a couple of days ago, it's as if the investors are giving Putin insurance for doing bad stuff. And the true irony is that many of these investors are the ones who have been running around touting, , their ESG cred. And at the same time they're giving Putin insurance to, you know, take over Ukraine. Now I'm probably overstating this, but yes, these clauses are very weird and they're a form of insurance protection for Russian misbehavior.
Joe: (12:41)
You know, it's interesting to hear the nature of these bonds issued after the annexation of Crimea. And I guess the degree to which that incident, that hostile act, did not seem to phase so many players across the rest of Europe. And I'm thinking also about a recent episode that we did on natural gas. And you think, okay, that could have been a moment where say, you know, countries decided, well, maybe we shouldn't be so reliant on Russian natural gas, nothing changed. And now here, you're describing kind of the same phenomenon where you say these ESG minded investors saw the annexation, then Russia went on to put in these clauses. Can you talk a little bit about more about what specifically are in these clauses? What do they say? And then what do they mean right now? And I should note, briefly for those who don't have a terminal, I'm looking at the terminal, and I don't know about the specifics here, but Russian bond prices have been absolutely killed. Dollar bonds that were over a hundred on the dollar at the beginning of February, are now around 11 cents.
Some more short-term Eurobond, in the thirties. So just for the context here, all types of Russian liabilities having been killed, but why don't we talk more specifically about what is in these clauses and what they mean for lenders?
Mark: (14:07)
Basically the clauses say that if, for reasons beyond Russia's control, I don't know if that's an exact quote, but it's pretty close. If for reasons beyond its control, it can't come up with whatever currency the bond is denominated in, then there's a list of kind of hard currencies that it falls back on. And if, for reasons beyond its control, it can't come up with one of those, then it pays in rubles and they don't say anything beyond that. And so the question really is for this subset of the Russian bonds, whether the sanctions regime and the inability to access foreign exchange, whether that constitutes circumstances outside Russia's control or whether really the whole thing is within Russia's control, because they could just turn the tanks around and presumably the sanctions would be lifted.
Tracy: (15:02)
There's something else that's in the bonds that's relatively unusual or I should say there's something that's lacking in the bonds -- it doesn't include a waiver of immunity I think, or a clause that sort of submits to the jurisdiction of foreign courts. Can you explain exactly what that means and how it relates to, you know, for instance, if Russia said -- it can't necessarily do this today, but on future payments -- if it said, well, for reasons out of our control, we're gonna pay these bonds in rubles instead of dollars or euros and then foreign investors decide, Hey, we don't like that. We're gonna take Russia to court to argue against this. What does it mean from a jurisdictional perspective? Are they going to be able to do that?
Mitu: (15:49)
So this is the perfect follow up question to what Joe asked. So you have this clause that as Mark described says, you know, if, for reasons beyond our control, we are unable to pay in dollars, euros we'll pay you in rubles, but the contract doesn't say who gets to determine beyond control. I mean, does Putin get to determine, oh, I've decided you can't pay in dollars anymore. So it's beyond the control of the Treasury to pay. And normally when you would have a question like this, the place you would go is you would go to the clause in the bonds to see where do these cases get brought. Where has the sovereign submitted to jurisdiction? Where has it waived its immunity and these bonds again? And this is unusual again, and it is our fault for not noticing this or paying greater attention to this before the clauses explicitly say, we have not submitted to jurisdiction anywhere.
And the clauses explicitly say we have not waved sovereign immunity. Now here's the twist though. I think on first reading, if you are not a jurisdiction specialist, you would think, okay, so basically they can't be taken into court anywhere. They have not waived sovereign immunity and they don't submit to jurisdiction anywhere. That is wrong. Because if you go out and reach investors and sell them dollar bonds, or you send them eurobonds and you do that in New York or London, even though you say, I don't agree to jurisdiction anymore, the courts there can say, Hey, you came into our jurisdiction, you sold investors bonds here. We are taking jurisdiction and you are engaged in commercial activity. So we are deeming you to have wavec sovereign immunity. So, in a sense, Russia might think that they haven't consented to anybody's court jurisdiction, but I think that would be wrong.
Joe: (18:13)
Can I ask what is the consequence of actually defaulting? So Russia may have means at its disposal to avoid technically defaulting. Okay. Does it pay in dollars or some other hard currency, but it pays in rubles, so, okay, technically it avoids default. But again, in the context of this very unusual situation, what does that even mean? Because normally we think about, you know, sort of catastrophic consequences for a country that doesn't pay its foreign creditors, but in this situation, Russia is already dramatically cut off in away that's far worse than what we would expect to see any sovereign debtor experience in the event of a default.
Mark: (18:55)
So this is the hard question I think that investors are facing. It's kind of hard to know what to make of the -- let's assume again, that there has been a default by the time the episode airs. Your choices, I could accelerate the bond and I could decide I'm gonna go to court as Mitu says, I can probably convince a court in London or maybe New York to take jurisdiction. But if I do this, I'm in it for the long haul. You know, I've picked my path and I'm gonna be fighting with the Russian government for God knows how many years into the future or I can sit around and I can hope that this thing resolves in a way that allows for the resumption of payments. I have to think that for most investors, maybe not for the diehard subset who like the litigation game, but for most investors going to court and accelerating the debt is a pretty unappealing prospect right now. But we'll see. The longer this drags out the more that calculus might change. Mitu, I don't know, maybe you have a different view of it.
Mitu: (20:08)
No, in fact, my view in some ways -- unless Mark, you figure out a way we could start attaching those oligarch assets -- is that if you are really only chasing the Russian state, this is difficult. And we could probably take some lessons here from the attempts of jilted investors to chase after the Russian state for expropriation in the Yukos case. This, you know, I think bond investors haven't really paid very much attention to this, but there's basically, I think it's upwards of 60 billion in claims for which jilted investors have received judgements against Russia and Russia just have no intention of paying. And the markets don't seem to have penalized Russia for this, in the recent past, continuing to believe, oh, maybe they'll behave well with respect to the bonds, even though they're behaving so badly with respect to other claims. And you know, I mean, this is what, yeah. We all talk to our students about reputational consequences and how the sovereign debt market, it is such a robust reputational market. It might mean, you know, the recent experience maybe makes us think that's complete bull.
Tracy: (21:32)
I mean, you sort of touched on this before, but when we talk about going after oligarchs’ assets, I'm getting flashbacks to, you know, Paul Singer seizing that Argentine boat and stuff like that. To what extent could it be possible that the legal industry, they're less sympathetic to Russia in this context or that they harden up their view of Russia and it does become easier to pursue those assets? I mean, to some extent we've already seen this, right? A lot of things have changed over the past two weeks. Things that we thought were difficult to push through legally seem to have happened very quickly. And if they're not done purely through the law, they've been done through self sanctioning and companies and people voluntarily cutting Russia out of the system. So I'm just wondering, is there the possibility that it begins to change?
Mark: (22:30)
Yes. Now, would I handicapped that possibility? No, I, or at least I wouldn't know how to do it, but if you think about some of the recent developments that might be relevant here, they're actually not what one would expect from the usual kind of creditor activity. They're not courts being a little more receptive to assets. They're things like the U.S. government, just deciding that it's gonna use a bunch of Afghanistan central bank assets to pay some creditors. You know, this is why the geopolitics actually matters quite a lot. It's not clear to me that the real way to get at oligarch assets here is you convince a court that they're the alter ego of the Russian government, and you attach them and you have an execution sale, but governments are coming mighty close to just appropriating assets when they feel that that's necessary as part of the sanctions regime and that they've got the sort of political support to do it. So I don't know whether we should expect the wholesale appropriation and redistribution of oligarch assets, but I do think that anybody with a bone of legal realism in their body has to think that courts and other legal actors are gonna be more receptive to this kind of thing now than they were five years ago, or even frankly, a month.
Joe: (24:05)
Presumably for the creditors though, this sort of more political appropriation, as opposed to the court avenue is less appealing in the sense that if it just sort of goes through sort of political apparatus, those assets aren't necessarily going to be iquidated to the benefit of creditors?
Mitu: (24:25)
Well, maybe, and maybe not. So what we've seen recently with the Iranian central bank assets and most recently with the Afghan central bank assets, is that the administration, I think using executive order, and then some congressional action has said, you know, we're, we're making these wide open, fat and happy for a certain subset of claimants to go after. So this is very different. At the beginning of the podcast, you and Tracy, were talking about the analogies or memories of the 1918 default on the czar’s debts. Back then, and then subsequently, you know, when Germany defaults in the Nazi era. Governments were very careful about not doing things to enable private claimants to seize foreign state assets. Today that's completely changed. Governments are much more willing to say to private creditors, you know, they're not behaving well, we’re gonna make it possible for you to seize that asset. Now, I'm not sure if President Biden will use that path today to allow Paul Singer and his lawyers to go after these assets. But if you look at who's talking in the press today, who is salivating at the possibility of seizing assets, and you have to read between the lines, I think a lot of those actors in the Argentine episode, they've got their guns ready.
Mark: (26:18)
If I can just add one quick point. So there's two things here that point in slightly different directions. One is to the extent we're looking at these non-traditional ways to distribute assets, then financial creditors are gonna be competing with other claimants and will maybe not be the most sympathetic of the group. So it certainly wasn't to help financial creditors that Afghan or Iran central bank assets were accessed. The other thing I just wanna point out though, is one of the reasons why efforts to get at Russian assets failed historically, in the recent years anyway, is because countries were worried, the Russians explicitly threatened, Hey, if you let private creditors get at our assets, we're gonna do the same thing to your assets here. And of course, we'll gin up some claims, , and we're gonna appropriate in effect your assets here -- query whether that kind of threat, which was quite effective at getting courts and legislatures in Europe to back off, their willingness to let creditors get at Russian assets query, whether that kind of threat works now.
Tracy: (27:30)
You know, you mentioned the sort of types that were active in the Argentina situation circling now. And I realize we've made it about 30 minutes into this podcast without actually mentioning pari passu. So maybe we should talk about that and how it potentially applies to the Russia situation, because I think you've pointed out that there is another way that the Russian bonds are kind of weird and unique, and that has to do with the way the pari passu clause was originally structured. Then it seems to have been revised. So could you maybe walk us through what exactly happened there and what pari passu is for those who don't know?
Mitu: (28:12)
Oh, I'm so glad you asked this question. I love pari passu.
Tracy: (28:17)
You knew it was coming.
Mitu: (28:20)
And it's my favorite part. Pari passu, which just means in Latin equal or equal step, is this old obscure clause from over a century ago, at least, that's basically in every bond contract and in around 2000/2001 in an obscure case involving Peru, Paul Singer's operation Elliot Associates, they were trying to sue Peru for not paying it. They had held out from debt restructuring, and they came up with this incredibly clever strategy, using the clause that basically everybody who had written about it in the literature until then said, you know, there's this weird clause, but we don't know why it's there. It's kind of old. And so we repeat it. It's pretty, it has some Latin, we like Latin. And they said, Hey, it says in equal step. In equal step means you can't pay some creditors, even though those creditors took, you know, 20 cents on the dollar, and not pay us. Equal means you have to pay us an equal percentage of whatever you're paying.
And they said, since we didn't restructure our debt, you have to, if you are paying them a hundred percent of their restructured debt, that means 20 cents on the dollar, you have to pay us a hundred percent of our non-restructured debt, which is a hundred cents on the dollar. And they made a killing against Peru. Everybody thought this strategy would never work. You know, my co-authors and I, which include Mark, ee did interviews with basically every senior sovereign debt lawyer in London and New York. And we said, aren't you worried about this happening again, this crazy strategy, since you guys haven't changed your clauses? And they said, no, no court in England or New York would ever follow the crazy Brussels strategy. And Elliot Associates ran the same strategy again against Argentina and this time, instead of winning about a $100 million, they win $2 billion.
And so now the fast forward to today, basically every international issuer in the sovereign debt market changed their clauses in order to preempt this strategy. And they did this around 2014. I mean, time of Crimea and Mark and I, and Mark can correct me, I thought this is the end of this story. In fact, many articles were written about this is the end of the story. Turns out the Russian bonds have the old pari passu clause. Oh, the old one that Elliott won on. And I mean, I can't help but think it's either the Russians were so arrogant that they thought they would never get sued or somebody goofed. Now there are other goofs in the specific pari passu clause. And we can't tell whether they're intentional or not. But the key point is if I were an institution like Elliot, although they've become more respectable now, I would read this clause and say, Hey, I can run this again. I don't know what, what you guys think, but for me, the, this is so fantastic.
Tracy: (31:45)
Well, Mitu, just on that note, I mean, it does seem like there was a change to the pari passu clause where they deleted the idea that the pari passu would, would sort of, um, apply in the future. And it seems like they altered the language to suggest that it just a pause at one point of time. What does that mean, exactly? It seems like the implication would be that the government could subordinate some investors at a later date.
Mitu: (32:17)
Okay. So you're really getting into the weeds of the provision.
Tracy (32.20):
Sorry.
Joe: (32:23)
This is good, I’m enjoying sitting back and listening, hearing Tracy's expertise on questions.
Mitu: (32:28)
So normally the pari passu clause that nobody understands says the bonds rank and will rank equally with all other debt. And let's not talk about the all other debt. So rank and will rank. So it's a representation at the time he bond is issued saying they all rank equally now. And then it says in the future, we will continue to make sure they rank equally. In the Russian clause, it says basically the bonds rank equally. They deleted the words having to do with the future. The will rank. Now I think the question for a court will be, do we read it as the bond just saying they ranked equally at the time of issue, which makes the whole passu clause gibberish, meaningless, because the whole point of the clause is that it protects you against future misbehavior by the sovereign, right?
Or is the court going to say, oh, that looks like a typo. And it also doesn't make sense with, they have events of default saying it is an event of default if the bonds no longer ranked pari passu. So, I mean, there are these giant inconsistencies in the document and a court's going to have to decide. And of course, this goes back to the fact that we have no idea which court, but a court's going to have to decide, are these typos or are these brilliant strategic moves by the Russians to make sure they never have liability? My guess is an Elliot Associates would be able to make a good argument, but again, it's not clear Tracy, I mean, you have pointed out a very crucial portion of this truly obscure clause, the deletion of some two words that that could be valued at a few billion dollars.
Joe: (34:34)
Thinking about the Argentina legal fight, it obviously dragged on several years. And as we've been talking about Russia is in a unique situation because it's already just in the last few weeks become so cut off from the world far more than even we would expect to see from a sovereign debt issuer, how much do some of the consequences and legal questions that you're talking about in the last few answers, how much do they essentially only become relevant in a future world, down the line, when perhaps under a different Russian president, who knows, but it's hard to see it under the existing one, Russia makes an attempt to sort of rejoin the financial world in good standing, because obviously in the current moment, you know, no one is going to be buying new Russia debt, and basically it's cut off financially, but there could be a point 10 years from now, or five years from now, where a different Russian government wants to become part of the global market again. How much do these questions essentially become relevant as well, they're going to have to resolve these legal fights by then in order to rejoin the financial system.
Mark: (35:46)
I mean, I think this is not just a great question, it's the question that determines whether going to court and playing the litigation game is worthwhile. The Argentina example is a great one because it was not just a few years. It was 15 years. The first big chunk of that was spent chasing Argentina's assets around the world and coming up, mostly empty handed. And then everything came to a head with this pari passu litigation that Mitu was talking about, but the reason it all worked, the reason it produced a big payout at the end of the day, is because there was a change in government. And because Argentina wanted to normalize its financial and commercial relationships with the rest of the world. So I guess the question is this, do you, if I'm an investor, do I think Russia is gonna want to normalize those relationships? Or do I expect to be looking at Fortress Russia for the next 15 or 20 years? Because if it's the latter, I can have all the enforcement rights in the world, I can have the best written contract that gives the most potent set of enforcement rights in the world. But unless I get lucky, I'm not gonna get paid. And one thing’s for sure, most investors will not get paid. The only way you get paid is when the country wants to normalize its relations.
Tracy: (37:14)
Can we maybe talk a little bit about Ukrainian debt and what we might expect to see there as well? Because a lot of the focus has naturally been on Russia. It has a lot of issuance. It seems like there's a very big question mark over whether or not it's going to be able to pay out on what it owes, but Ukraine has issued in the market as well. And also is presumably financially and perhaps operationally strained given it's fighting against Russia at the moment. So what happens there?
Mitu: (37:46)
In some ways, this is the bigger and more interesting question to me. Ukraine has, if I'm not mistaken, almost us double the amount of sovereign debt that Russia has -- somewhere in the range of 90 plus billion dollars worth of debt. And they were already in trouble before the invasion. Right now, I mean now that that they have by estimates a hundred billion dollars plus in damage to their country and they're desperately spending their money and defending themselves, it seems for sure that they are going to go into default, but there are another couple of complicated questions here, complicated because the relevant law goes back again to 200 years ago. One of which is at some point, Russia has taken over in its invasion so much of Ukraine that the debt becomes Russian debt. And at that point, investors are going to have to sue Russia for the debt. And one other complication in this is what happens to the debt that Ukraine is desperately trying to raise right now, in order to fight the Russians, does Russia have to pay that debt as well after it takes over the Ukraine? It's not clear. The old international law actually said that Russia might not have to pay that debt. That strikes me as completely antiquated and wrong, but that is what the old law would've said.
Joe: (39:33)
Ukraine obviously needs money to fight, to defend itself right now. And suppose, you know, the war comes to an end and Ukraine sovereignty is intact. Is that debt treated just like any other debt that would be issued in normal times? Are there opportunities for forgiveness of that debt? Are there other ways that it can raise money beyond debt markets such that it doesn't impose a future financial burden? What is the optimal way to fund its defense efforts internationally without creating this huge future burden?
Mark: (40:10)
So Mitu may have more developed thoughts on this than I do. My initial reaction, first of all, is that this is a relatively happy set of circumstances. And so I only hope that this is the problem we're dealing with down the road. Going to commercial creditors and asking them for concessional treatment to get you back on your feet after something like this, you know, surely there's going to be a restructuring. There would need to be a restructuring. And I would imagine that commercial creditors might be a little bit more willing to participate than in the normal case. But, you know, I don't see any way that you even begin to restructure the debt that Ukraine has much less begin the process of rebuilding without massive concessional and official finance. And surely the private sector has a role in that. But I think it's a relatively small one. Mitu, maybe you have a different view.
Mitu: (41:14)
No, I mean, there are two questions and Joe, I hope I'm not miss understanding you. The two questions are one, what happens now if the bond markets, the private bond markets are reluctant to fund Ukraine? And then the other question is what happens after all of this blows over assuming Russia doesn't take over all of Ukraine. What happens to Ukraine there? I think, and maybe I'm just echoing what Mark is saying. I think in both cases, the official sector, meaning mostly Western Europe and the United States, needs to step in and provide the support now because the private markets are going to be reluctant to support Ukraine and B) promise to support them after the fact in the restructuring, that is surely not their fault. Yes, they are precarious, but they're precarious because of the invasion of Crimea. And after that invasion, the official sector didn't really say, this is not your fault, we're gonna help you in a big way. They made Ukraine deal with the private creditors and Ukraine actually got pretty harsh treatment in that restructuring after the 2014 invasion. I think this time we need, the rest of the world, needs to do a lot better vis a vis Ukraine. But those decisions have not been made. I mean, this is just all been left up in the air as if nobody really thinking ahead.
Tracy: (42:56)
Mitu, I think that's a good place to leave it. And obviously there are so many questions around this entire situation. It's gonna be absolutely fascinating to see how it all plays out. So thank you to you and Mark as well for coming back on the show.
Mitu: (43:11)
Thank you so much. Thanks for having us.
Tracy: (43:13)
Well, Joe, I found that convers absolutely fascinating, and clearly there are a lot of threads to follow, but you know, one kind of crazy thing to think about is that I mentioned that 1918 debt when we started, I mean, some people are still holding certificates, you know, stored in their attics. You can buy them off eBay and things like that, and still waiting for a payout and thinking it's gonna happen. And so it's kind of weird to think that maybe we're in a similar situation now where people are gonna be holding onto Russian bonds and waiting for a payout a hundred years from now,
Joe: (43:49)
EBay, the real OTC bond market, the original, or maybe the original electronic bond marketplace. But no, it all seriousness, a century is a very long time, but it does seem like in many cases for the investors that you know, are looking for a big payday, the bet is years and years down the road, because it really does seem there's very little prospect of some sort of, I mean, I think a lot of people think, that as long as the current government is in place in Russia, that there's going to be some big reproachment and reintegration, I mean, there may be some dropping of the sanctions after the war, hopefully a positive outcome, but it is hard to imagine a complete rollback, right? Going back to the early 2022 status quo and as such, it may be that some of the big payout could be 15, 20 years, who knows how far into the future.
Tracy: (44:48)
Totally. But the other thing that this all reminded me of, and I think I've touched on this in various works before, but this idea that bonds, ultimately, they have so much morality and values sort of embedded in them, and they all have a story, right? Like these bonds were issued because of this. And it means I owe money to this person because of that. And when the story starts to shift, and when the values we attach to that debt start to shift, which is arguably what we're seeing with Russia now, you know, three weeks ago, Russia was investment grade and it was considered obviously not a pristine player on the international stage, but acceptable for people to do business with. And that has just completely changed in less than a month.
Joe: (45:32)
I think that's a really good point. And the idea of the sort of, once a new story is attached, then perhaps the law follows. And so a good example of that could be sort of this question of all right, are oligarch assets held abroad? Can they be seized and liquidated for the benefit of creditors, that has been very legally difficult to do in the past, but already as our guests discussed in the last few weeks, we've seen a rethinking of certain Western governments to the idea of seizing liquidating oligarch assets, and as such, maybe what seemed to be an impossible veil to pierce previously may suddenly possible. It just changes the environment.
Tracy: (46:14)
This is exactly it, and not just liquidated to satisfy creditors, but could they, for instance, and Mark sort of hinted at this, could they be liquidated to fund some sort of, you know, war aid or compensation for people in Ukraine?
Joe: (46:26)
Right, and the fascinating question of whether Russia itself may be a creditor for debt being currently incurred by the Ukraine government is a fascinating question. The other thing that I found really striking is this idea that again, after the annexation of Crimea, Russia seemed to pay no penalty. And in fact, it, even that it stipulated, it put it in this new language about possible sanctions and yet was still considered the bonds were trading strongly. This idea that after this incident that almost nothing fundamentally changed is incredibly striking and almost maybe shameful, sorry.
Tracy: (47:10)
Hmm. Yeah. Well I feel like we could talk about this for another four hours, but shall we leave it there?
Joe (47:15):
Let's leave it there.
You can’t follow Mitu and Mark on Twitter but you should definitely check out their own podcast, Clauses and Controversies.