While the debt is substantial, it’s probably not enough to cause a systemic problem for financial markets. That’s the view of International Monetary Fund Managing Director Kristalina Georgieva, who said last weekend that banks’ exposure is “not systemically relevant.”
A handful of the sovereign eurobonds do have contractual language allowing payments in local currency, and some companies issued their debt via foreign subsidiaries and have dollars offshore. Yet there’s still huge uncertainty, especially as clearing houses including Clearstream and Euroclear have stopped accepting the ruble as a settlement currency and have barred Russian entities from most transactions.
If bondholders don't get paid in dollars on Wednesday, it would be the start of a very long, complicated process. History is an imperfect guide, but according to World Bank Chief Economist Carmen Reinhart, Russia already holds the record for the longest time between a default and some form of resolution with creditors, the near seven-decade gap to 1986.
As for Russian companies, even before a single one misses a payment on its obligations, another challenge is emerging: finding lawyers and advisers willing to take their business. Last week, JPMorgan Chase & Co. declined to advise search engine Yandex NV on a potential debt restructuring.
In the meantime, multiple deadlines are looming. Steel and mining company Severstal has a coupon due Wednesday, and both Evraz and Tinkoff Bank have interest payments due Sunday. Gazprom has payments next week, with issuers including Sibur and Polyus to follow.
Creditors of companies that fail to pay their debts will likely have limited recourse in the near term, according to Tuck Hardie, a managing director in Houlihan Lokey’s financial restructuring group.
“As a practical matter, people may have to just stare at each other for a little bit,” Hardie said. “If the business is located in Russian sovereign territory, you can’t go after its assets. If it’s not, you might see the companies proactively file for court protection to prevent foreclosures, or you might see them enter into forbearance arrangements with debtholders.”
Lee Buchheit, one of the world’s most prominent debt-restructuring experts, says investors should get ready for a long haul. He suggests creditors may also be particularly tough with Russia for moral, as well as financial, reasons.
“There is nearly universal support for Ukraine, even among normally hard-bitten institutional investors. Some of those investors might want to strike a blow for the cause,” said Buchheit. “One way to do that would be to vote to accelerate Russian external bonds once the grace periods run out and pursue legal enforcement of the instruments. I would not be surprised if some bondholders decide to do this with greater alacrity than we normally see following a sovereign bond default.”
--With assistance from Maria Elena Vizcaino, Laura Benitez and Srinivasan Sivabalan.
This article was provided by Bloomberg News.