Explainer: Faced with Russia’s default, bondholders brace for legal maze

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A view shows Russian ruble coins in this illustrative photo taken March 25, 2021. REUTERS/Maxim Shemetov/Illustration/File Photo

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LONDON/NEW YORK, June 27 (Reuters) – Holders of Russia’s external debt, which Washington says is already in default, face unusual circumstances: Moscow has the funds and says it wants to pay but is unable to do so due to sanctions imposed after it invaded Ukraine. Read more

The context adds to the complexity: the bonds were issued on unusual terms, the issuer is waging a war that shows little sign of abating, and it has been cut off from the global financial system.

Below are possible scenarios for investors holding some of the approximately $40 billion of outstanding Russian foreign currency sovereign bonds.

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ACCELERATION

Creditors can demand full payment, known as acceleration, if a debtor breaches the bond contract. But there are rules on how it can be triggered.

A group representing at least 25% of outstanding bonds is required to declare an event of default and accelerate payments, under the terms of the Russian Bonds 2026 and 2036. Such a declaration allows bondholders to demand payment of all outstanding debts , regardless of their maturity.

This scenario could be reversed by a vote of “at least 50% of the aggregate principal amount of outstanding bonds”, as this is the percentage needed to waive an event of default.

“The Russian Federation will notify the bondholders (with a copy to the financial agent) of this, after which the corresponding declaration will be withdrawn and will have no further effect,” according to the terms.

It is unclear what percentage of the two bonds in question – but also of Russian bonds more broadly – is held by foreign investors and how much by domestic investors.

COURT CASE

Suing Russia for a sovereign default does not seem straightforward. The terms of the bonds are unusual and sometimes vague, especially for those issued after Russia was hit by its annexation of Crimea in 2014 and the poisoning of a spy in Britain in 2018.

For example, Bonds are governed by English law, but many do not specify the jurisdiction where disputes should be settled.

This could allow Russia “to go to court in Moscow while creditors seek to sue in London or New York,” according to Mitu Gulati, a University of Virginia law professor and debt restructuring expert.

Tatiana Orlova, chief economist at Oxford Economics, said investors had plenty of time to weigh their options.

“It is possible that some bondholders will delay filing claims against the Russian government because the bond documents set a period of three years from the date of payment at the end of which such claims lapse,” he said. she declared.

Dennis Hranitzky, head of sovereign litigation at the Quinn Emanuel law firm, said while there were indications that some holders wanted to be “first in the courthouse”, he expected most bondholders “be deliberate”.

Hranitzky, who has advised creditors on numerous sovereign debt restructurings, including in Argentina, said any lawsuit was likely to drag on.

“Everything will be played in slow motion – nothing will really happen until the end of hostilities.”

ARBITRATION

Investors from jurisdictions that have bilateral investment treaties with Russia could attempt arbitration against Moscow to seek damages and other relief.

Russia has dozens of such treaties, including with most European Union countries, the United Kingdom and Canada. There have been 27 such investment disputes involving Russia since 1996: 10 ongoing, one dropped, one settled, 11 decided against Russia and four in favor, Conference data shows United Nations on Trade and Development.

WAIT SEE

One option for foreign creditors is to wait, at least for now.

Many funds have already been withdrawn from Russia due to a combination of sanctions and customer pressure following the February 24 invasion. Even those who still held titles had to depreciate them. Either way, the damage is probably already done.

A number of fund managers may decide to simply hold onto their bonds, for now.

“They have no weight in the benchmark, they are valued at very low prices and obviously the sanctions in the secondary Russian bond market will push them even lower,” said Carl Ross, partner and credit analyst. sovereign at GMO, which holds the Russian debt. .

“As long as Putin is in power, there is probably no expectation of recovery – but at some point the claim survives.”

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Reporting by Jorgelina do Rosario in London and Rodrigo Campos in New York; additional reporting by Karin Strohecker; Editing by Tomasz Janowski

Our standards: The Thomson Reuters Trust Principles.


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