The Rest of the Story (for This Week) On Russia's Bonds

The news hit the internet at 11:17. We were in class, but it was there when we got out and checked the Bloomberg terminal.

Russia did pay the dollar-denominated interest on those two sets of bonds, on time.

This is a strong signal that default scares the c**p out of Putin and other decision-makers.†

***

So, there are sanctions on Russia's accounts in the west. But they aren't complete.

On Monday, Russia got a communication, presumably without using SWIFT, to its correspondent bank, J.P. Morgan. This connected them to an account somewhere with dollars in it that was not under sanction. Russia has about $100B in FX in China, but it's not clear if that's held in dollars or not.

J.P. Morgan did not know if this was OK, so they contacted the U.S. Department of the Treasury. There, the Office of Foreign Asset Control (I'd never heard of that either) made the decision that 1) they can do whatever they want with non-sanctioned accounts, and 2) it's OK for anyone to accept money from Russia (it's not clear if that is only from non-sanctioned accounts or all accounts). Both of those are OK until some time in May.

When that came through, J.P. Morgan forwarded the money to Citibank, which handles disbursals for those bonds. Investors started getting there money by this afternoon.

This all sounds a little hokey. But, the idea of sanctions is to get the money out of Russian hands. Allowing the payment got non-sanctioned money out of Russian hands, and  kept international investors happy, so it's a win-win.

***

So, not only didn't Russia default (this time), they paid in dollars instead of rubles.

I had missed this, but apparently the CDDC ruled on Friday that paying the interest on those bonds in rubles — because it was part of the contract — was OK.

But Russia didn't take advantage of that. Why?

My guess is that even though it would have been legal, the Russians were told that if they did this it would not be viewed as a good faith payment, and that institutional investors would hold that against them (by charging them a much higher rate) in the future.

***

Earlier this week you could've bought those Russian bonds for about 20% of their maturity value. Now that's up to 40%.

The price of CDS's on Russian 5 year bonds has dropped down to about $1,700.

Next up are payments that have to be made in euros on the next two Mondays.

† Why are bond defaults such a bad thing? Because no one will loan you new money until you settle the old loans. The Washington Post reports in "Will Russian Bonds Default? There's Debate About That" that some bonds from Czarist Russia that were repudiated by Lenin after the Russian Revolution were settled in 1986. And a letter to the editor of the Wall Street Journal notes that before France would allow Russia to sell bonds there in 2001, they had to make payments on bonds people had been holding onto since the 1890's, which had also been repudiated by Lenin. I hadn't heard of the first case, but I do recall being amused at the second one when it was in the news.