“Remember LTCM? That wasn’t necessarily on anyone’s radar screen at the outset of the Russian default in August 1998,” said World Bank Chief Economist Carmen Reinhart. “Those things start to surface. Exposures are opaque.”
In a decree issued on March 7, President Vladimir Putin set out new rules for debt settlements and divided foreign creditors into two categories: those from “countries that engage in hostile activities” can only be paid interest and principal payments in rubles.
The new procedure involves opening so-called Type C accounts, which can be done automatically without the consent or involvement of a foreign creditor, Morgan Lewis partner Grigory Marinichev said. For investors based in unfriendly nations, receiving transfers into Type Cs is “equivalent to paying into a blocked account,” Marinichev said. “You can’t repatriate those rubles.”
Any such payment would likely kick off a bout of legal wrangling between Russia and its bondholders over what constitutes a legitimate settlement of the debt. That matters not just for bondholders but for the investors holding $40 billion worth of credit default swaps linked to Russian debt.
--With assistance from Selcuk Gokoluk, Andrew Monahan, Irene García Pérez and Giulia Morpurgo.
This article was provided by Bloomberg News.