By Associated Press
What can investors do?
The formal way to declare default is if 25% or more of bondholders say they didn’t get their money. Once that happens, provisions say all Russia’s other foreign bonds are also in default, and bondholders could then seek a court judgment to enforce payment.
In normal circumstances, investors and the defaulting government typically negotiate a settlement in which bondholders are given new bonds that are worth less but that at least give them some partial compensation.
But sanctions bar dealings with Russia’s finance ministry. And no one knows when the war will end or how much defaulted bonds could wind up being worth.
In this case, declaring default and suing “might not be the wisest choice,” Auslander said. It’s not possible to negotiate with Russia and there are so many unknowns, so creditors may decide to “hang tight for now.”
Investors who wanted out of Russian debt have probably already headed for the exits, leaving those who may have bought bonds at knocked-down prices in hopes of profiting from a settlement in the long run. And they might want to keep a low profile for a while to avoid being associated with the war.
Once a country defaults, it can be cut off from bond-market borrowing until the default is sorted out and investors regain confidence in the government’s ability and willingness to pay. But Russia has already been cut off from Western capital markets, so any return to borrowing is a long way off anyway.
The Kremlin can still borrow rubles at home, where it mostly relies on Russian banks to buy its bonds.
What would be the impact of Russia’s default?
Western sanctions over the war have sent foreign companies fleeing from Russia and interrupted the country’s trade and financial ties with the rest of the world. Default would be one more symptom of that isolation and disruption.
Investment analysts are cautiously reckoning that a Russia default would not have the kind of impact on global financial markets and institutions that came from an earlier default in 1998. Back then, Russia’s default on domestic ruble bonds led the U.S. government to step in and get banks to bail out Long-Term Capital Management, a large U.S. hedge fund whose collapse, it was feared, could have shaken the wider financial and banking system.
Holders of the bonds — for instance, funds that invest in emerging market bonds — could take serious losses. Russia, however, played only a small role in emerging market bond indexes, limiting the losses to fund investors.
While the war itself is having devastating consequences in terms of human suffering and higher food and energy prices worldwide, default on government bonds would be “definitely not systemically relevant,” International Monetary Fund Managing Director Kristalina Georgieva has said.
