Bond markets forecast prolonged financial freeze for Russia

Russian government bonds fell below 10 cents on the dollar last week, putting the country’s debt on par with that of Venezuela, which was plunged into famine five years ago. The valuation is close to the low water mark on bonds set by serial defaulter Argentina, which took 15 years to repay creditors after a bitter legal battle with the hedge fund.

The country is facing a major interest payment on dollar-denominated bonds on Wednesday, and Russia’s finance ministry has sent conflicting messages to investors about whether it intends to give them dollars or rubles. The uncertainty led to concerns that payments in rubles could result in default and speculation about what legal remedies creditors could take.

Fund managers are also debating how long it will take for creditors to recover their money and are concerned about the reputation that hangs over all-Russian assets from stocks and bonds to oil and beer.

Russian bonds had an investment-grade rating and traded around 100 cents on the dollar until the country invaded Ukraine, prompting unprecedented financial sanctions by the US and European countries. The Kremlin responded with measures including a block on bond payments in foreign currencies such as the dollar and euro, which stoked hopes of default.

Distressed-debt investors, sometimes called vulture funds, typically flock to trading government bonds at such low prices. They are intended to negotiate payments when countries want to recapture international bond markets or force them to pay through litigation. Hedge funds are reluctant to play down that playbook with Russia.

Bondholders will struggle to seize Russia’s foreign assets through lawsuits, said Jay Newman, a former portfolio manager at Elliott Management Corp., who led the international lawsuit against Argentina that made the hedge fund $2.4 billion in 2016.

Mr. Newman said, “There is no investor protection in bonds, so it will be a very tough fight. Let’s say you win even one decision, it will be very difficult to implement against a country like Russia.”

Analysts said bringing Russia to the bargaining table could be as challenging as the country could survive for years without borrowing internationally. Last year, about 80% of its debt was with domestic investors, according to S&P Global Ratings, and its oil exports bolster government cash reserves, giving investors little negotiating leverage.

The last time Russia defaulted was in 1998, Boris Yeltsin’s government struggled to meet expenses based on the International Monetary Fund for aid. Hedge funds bought ruble-denominated Treasury bonds for less than 10 cents on the dollar, one fund manager said, more than doubling their money after swapping debt for new securities.

Carlos de Sousa, a fund manager at Vontobel Asset Management, said that if foreign bondholders tried to cut a restructuring deal with Russia, they would be barred from US or EU sanctions on joining Russia’s federal government. . Investors are unsure how long the sanctions will last, even if the war in Ukraine ends.

Some investors looking to buy Russian debt have struggled to do so because Western sanctions have caused companies in the process of trading in Russian bonds to reduce their activity.

Mr Neumann said that at current prices, Russia’s biggest foreign bondholders would be better off holding the debt unless they were forced to sell under legal requirements. “Mark it to zero, forget about it and see how things develop.”

According to Advantage Data Inc., Russian dollar-denominated sovereign bonds are quoted at about 8 cents on the dollar, but trades are taking place for less than 5 cents, fund managers said. According to Advantage Data, Argentine bonds were quoted as low as 6 cents in 2009 during the global debt crisis.

University of Virginia law professor Mitu Gulati said Russian debt owners could recover some, but probably not for decades. Investors who bought the defaulted bonds of the Russian imperial government that fell in 1917 were partially repaid in the 1980s when Soviet leader Mikhail Gorbachev sought to access the capital markets.

For many investors, even the war in Ukraine is giving them pause.

“I’ve never seen a situation before where everyone is doing a gut check and saying ‘does this cross the border?'” said Hans Humes, founder of Greylock Capital Management LLC. Hans Humes said. “I’ll go wherever I go, I’m just not going to [Russia],

This story has been published without modification to the text from a wire agency feed