WEBVTT - What the Russian Revolution Can Teach Us About Bond Bubbles 0:00:11.760 --> 0:00:15.120 Hello, and welcome to another episode of the Odd Thoughts Podcast. 0:00:15.200 --> 0:00:19.840 I'm Tracy Alloway and I'm Joe. Wasn't all so Joe, 0:00:20.000 --> 0:00:22.840 I think? Uh oh, I'm trying to remember now. It 0:00:22.880 --> 0:00:26.599 must have been maybe four or six weeks ago. You 0:00:26.680 --> 0:00:30.920 were away and I recorded an Odd Lots all by myself, 0:00:31.000 --> 0:00:33.479 and I felt really bad because it was a really 0:00:33.560 --> 0:00:35.600 good episode. I think you would have enjoyed it. It 0:00:35.720 --> 0:00:38.520 was the one with mittwo Galate and we were talking 0:00:38.520 --> 0:00:42.320 about debt defaults. Yeah, Tracy, I was sad to have 0:00:42.400 --> 0:00:44.040 missed that one. I mean, I don't think you should 0:00:44.080 --> 0:00:46.680 feel bad per se that you did it alone without me, 0:00:46.840 --> 0:00:50.920 because you know, it's sort of occasionally I'll do one solo, 0:00:51.000 --> 0:00:52.760 you do one solo, we pick up for each other. 0:00:53.200 --> 0:00:56.720 But I do like that topic a lot, and so yes, 0:00:56.800 --> 0:00:58.880 I wish I had been part of it. Well. As 0:00:58.960 --> 0:01:01.560 my personal gift to you, we are going to do 0:01:01.600 --> 0:01:06.520 a sort of Redux episode. We're not talking about defaults 0:01:06.640 --> 0:01:09.520 or sovereign debt restructurings in general. We're going to talk 0:01:09.520 --> 0:01:14.319 about one very very specific instance of a debt default. 0:01:14.360 --> 0:01:18.360 In fact, it's probably one of the most famous of 0:01:18.440 --> 0:01:20.960 all time. It's certainly one of the biggest. In fact, 0:01:21.240 --> 0:01:23.920 depending on your definition of debt defaults and how you 0:01:23.959 --> 0:01:27.199 actually measure it, it is the biggest one of all time? 0:01:27.400 --> 0:01:29.240 Do you know what it is? No, So I was 0:01:29.280 --> 0:01:32.000 just gonna say, this is really embarrassing to me because 0:01:32.680 --> 0:01:35.880 I know which one we're doing, And if someone had said, 0:01:35.880 --> 0:01:39.280 what is the biggest sovereign debt default of all time? 0:01:39.880 --> 0:01:42.200 You say, oh, this is the most famous one. I 0:01:42.240 --> 0:01:44.039 don't even know if this one would have occurred to me. 0:01:44.600 --> 0:01:48.520 So I'm kind of embarrassed by the fact that I 0:01:48.560 --> 0:01:52.560 apparently didn't even know in advance what the most famous 0:01:52.560 --> 0:01:56.040 of the category was. Yeah, I think most people would 0:01:56.040 --> 0:01:59.280 probably you'd say Argentina, wouldn't you. I think you say, 0:01:59.320 --> 0:02:03.680 are Yeah, I might have said Russia in the late nineties. 0:02:04.320 --> 0:02:07.840 Oh yeah, okay, well that's closer. It is. It's Russia, 0:02:08.400 --> 0:02:12.280 but it's Russia in the early nineteen hundreds. So it's 0:02:12.360 --> 0:02:18.160 the famous uh nineteen eighteen repudiation of Russian debt once 0:02:18.240 --> 0:02:22.720 the Russian Revolution happened. And it's a really interesting moment 0:02:22.840 --> 0:02:26.280 in time in international finance because it touches on all 0:02:26.320 --> 0:02:28.560 these themes that you and I like to talk about 0:02:28.880 --> 0:02:32.800 one of them is bubbles, right, Russia issued an incredible 0:02:32.880 --> 0:02:35.760 amount of debt in the run up to nineteen eighteen, 0:02:35.880 --> 0:02:38.360 loads of people bought it, and then suddenly the whole 0:02:38.360 --> 0:02:42.240 thing collapsed. But the other really interesting idea here is 0:02:42.639 --> 0:02:45.880 the sort of notion of a safe asset that suddenly 0:02:45.919 --> 0:02:49.160 becomes not so safe. There's a moment in time when 0:02:49.240 --> 0:02:53.360 Russian sovereign debt was considered you know, really really pristine, 0:02:53.400 --> 0:02:56.960 almost like US treasuries today. And the other big theme 0:02:57.160 --> 0:03:01.919 has to be the politicization of it, or the ideology 0:03:01.919 --> 0:03:04.000 behind debt. And that's something that you and I have 0:03:04.200 --> 0:03:06.720 touched on at one point or another, in fact, maybe 0:03:06.760 --> 0:03:11.120 most recently with modern monetary theory. I'm I'm very excited 0:03:11.160 --> 0:03:13.440 about this for all of the reasons you laid out. 0:03:13.440 --> 0:03:16.120 So who are we talking to? So today's Odd Lots 0:03:16.200 --> 0:03:19.840 guest is Hassan Malik. He is the author of Bankers 0:03:19.840 --> 0:03:23.760 and Bolsheviks, International Finance and the Russian Revolution, and he 0:03:23.880 --> 0:03:27.320 is also an emerging markets hedge fund analysts. So, Hassan, 0:03:27.520 --> 0:03:29.880 thank you so much for coming on. Thanks guys, thanks 0:03:29.919 --> 0:03:32.680 for having me. So this book was a really, really 0:03:32.760 --> 0:03:36.320 great read. I'm just wondering why did you decide to 0:03:36.440 --> 0:03:41.440 focus on this particular episode of international finance. It goes 0:03:41.520 --> 0:03:44.320 back to my days working at an investment bank in 0:03:44.760 --> 0:03:48.440 Moscow and really living in the center of the Russian capital. 0:03:48.520 --> 0:03:51.160 I was walking around every day and struck by the 0:03:51.240 --> 0:03:56.200 degree to which banks from before the revolution are present 0:03:56.240 --> 0:03:58.600 in the built environment in the city center, be it 0:03:58.880 --> 0:04:02.320 the Lubyanka which is the former headquarters of the KGB, 0:04:03.080 --> 0:04:08.320 be its old bran bank branches that are repurposed as 0:04:08.360 --> 0:04:11.880 modern retail or office space. And really, when I was 0:04:11.960 --> 0:04:15.280 in graduate school and studying financial history, what really struck 0:04:15.320 --> 0:04:18.400 me as the degree to which this financial past of 0:04:18.480 --> 0:04:22.240 Russia was largely unremarked in the histories that we we 0:04:22.320 --> 0:04:25.920 have of the of of that time period. Yeah, Tracy 0:04:26.200 --> 0:04:29.720 lead in with, oh, this is the most famous debt 0:04:29.760 --> 0:04:32.520 default of all time. So I'm glad that there's at 0:04:32.560 --> 0:04:35.120 least some people who have, you know, forgotten about this 0:04:35.200 --> 0:04:38.840 period who I imagine, like me, this episode would not 0:04:38.920 --> 0:04:42.680 have been top of mind when thinking about debt default. 0:04:43.080 --> 0:04:46.960 But before we get to the default, obviously, what was 0:04:47.040 --> 0:04:51.719 it about Russia at the time that caused so much 0:04:51.760 --> 0:04:55.000 money to pour into their and for their government bonds 0:04:55.240 --> 0:04:58.719 to be seen as you know, a relative safe haven asset. 0:04:59.760 --> 0:05:03.880 So Russia was in many ways the emerging market boom 0:05:03.960 --> 0:05:07.080 story of the time. The Russian government was actively tapping 0:05:07.080 --> 0:05:10.680 the international bond market to build up gold reserves so 0:05:10.720 --> 0:05:13.000 that it could go on to the goal standard, and 0:05:13.080 --> 0:05:17.600 also to help finance and industrialization drive, led principally by 0:05:17.640 --> 0:05:21.279 the railroad industry. It really was, in many ways, not 0:05:21.480 --> 0:05:25.560 unlike China today, both a massive player in the emerging 0:05:25.560 --> 0:05:30.520 markets markets finance story, as well as a geopolitically speaking, 0:05:30.560 --> 0:05:33.880 a great power at the center of European and indeed 0:05:33.920 --> 0:05:38.160 global power politics. Right. So you mentioned the geopolitical aspect 0:05:38.200 --> 0:05:41.000 of all of this. Talk to us about who exactly 0:05:41.640 --> 0:05:45.440 was buying the debt that Russia was selling, because you know, 0:05:45.520 --> 0:05:48.160 obviously it's an emerging market play, lots of people want 0:05:48.200 --> 0:05:50.239 a piece of that. But you talk a lot about 0:05:50.279 --> 0:05:54.320 the political dimension of the foreign investors who were basically 0:05:54.560 --> 0:05:58.600 funding the Russian government at this point. Right. So, basically 0:05:58.640 --> 0:06:01.679 what was happening at the time was Germany was rising, 0:06:02.200 --> 0:06:07.000 and this was a story that was complicating the European 0:06:07.240 --> 0:06:11.440 balance of power in diplomatic and geopolitical terms. Now, at 0:06:11.440 --> 0:06:14.600 the time, France had the highest savings rate in Europe, 0:06:14.680 --> 0:06:18.600 and France was threatened by a rising Germany, which had 0:06:18.600 --> 0:06:21.640 had fought a war with in the late nineteenth century. 0:06:22.120 --> 0:06:25.440 Russia in in similar Vein was eyeing what was happening 0:06:25.440 --> 0:06:28.080 in Germany with some concern in various circles of the 0:06:28.120 --> 0:06:32.600 Russian government. And so this is really what under scored 0:06:32.880 --> 0:06:36.359 uh not only a diplomatic but a financial alliance between 0:06:36.760 --> 0:06:40.120 the Russian and French governments. And ultimately what this led 0:06:40.160 --> 0:06:43.680 to was a huge amount of retail money moving into 0:06:43.760 --> 0:06:46.960 Russian bonds that were perceived at the time to be 0:06:47.560 --> 0:06:51.120 very safe, investment grade assets. And so that's in some 0:06:51.160 --> 0:06:53.240 ways one of the big contrasts with the present day 0:06:53.240 --> 0:06:57.720 emerging markets boom, insofar as it was really French individual 0:06:57.800 --> 0:07:01.120 savers and then over time their counterparts in Britain and 0:07:01.160 --> 0:07:03.840 elsewhere in the West, that we're investing in Russian government 0:07:04.279 --> 0:07:08.039 and corporate securities over the course of the late nineteenth 0:07:08.040 --> 0:07:11.120 and early twentieth centuries. I'm something that I'm interested in 0:07:11.240 --> 0:07:14.920 is the idea of government debt just or just this 0:07:15.000 --> 0:07:18.600 idea of safe haven assets. It always kind of feels 0:07:18.640 --> 0:07:20.720 modern to me. And I think about the U. S 0:07:20.760 --> 0:07:23.680 Treasury market, and there's all kinds of very good reasons 0:07:24.000 --> 0:07:28.160 why we price everything or so many bonds, whether it's 0:07:28.200 --> 0:07:32.520 a foreign debt or private credit markets, there's a spread 0:07:32.560 --> 0:07:35.520 to US treasuries and that's a common way to sort 0:07:35.520 --> 0:07:40.360 of measure the perceived risky nous of any other asset class. 0:07:40.440 --> 0:07:44.520 When did this concept of safe haven assets emerge? And 0:07:44.600 --> 0:07:47.480 you know, thinking back to retail investors in the early 0:07:47.560 --> 0:07:50.880 part of the twentieth century, when did these ideas like 0:07:50.960 --> 0:07:54.800 start to form about what was safe asset and how 0:07:54.880 --> 0:07:57.640 much part of one's portfolio one might want to allocate 0:07:57.680 --> 0:08:00.560 to them. Well, it's it's a great question, and it's 0:08:00.600 --> 0:08:03.480 fundamental to kind of this this story of the Russian 0:08:03.520 --> 0:08:06.400 and other emerging markets booms. I suppose it goes back 0:08:06.520 --> 0:08:11.520 to the first times people started thinking about investing outside 0:08:11.520 --> 0:08:15.240 their own home markets. And in that sense, as emerging 0:08:15.280 --> 0:08:19.160 markets deepened in the late nineteenth and early twentieth centuries, 0:08:19.560 --> 0:08:23.240 a hierarchy began to form of which markets were perceived 0:08:23.280 --> 0:08:26.400 as riskier versus those which were perceived as closer to home, 0:08:26.560 --> 0:08:29.880 both physically and in terms of a risk profile. And 0:08:29.920 --> 0:08:32.760 in that sense, Russia was very much seen as a 0:08:32.800 --> 0:08:38.400 quote unquote European great power country. It wasn't seen as 0:08:38.520 --> 0:08:43.280 some semi colonial domain out in Asia or Africa. It 0:08:43.320 --> 0:08:46.599 was seen very close both physically and in terms of 0:08:46.640 --> 0:08:50.320 the risk profile to core European economies such as Britain, 0:08:50.360 --> 0:08:53.720 France or Germany. So there are all these characters in 0:08:53.760 --> 0:08:58.440 your book that are strategically fueling what's eventually going to 0:08:58.559 --> 0:09:02.600 become a Russian debt bubble. On the Russia side, there's 0:09:02.760 --> 0:09:06.679 a relatively well known finance minister, and then there are 0:09:06.720 --> 0:09:09.880 all these i guess lesser known bankers from London and 0:09:09.960 --> 0:09:14.120 Paris who are sort of deployed to start making these investments. 0:09:14.600 --> 0:09:18.359 Talk to us about the actual people, you call them gatekeepers, 0:09:18.960 --> 0:09:23.840 the gatekeepers to Russian debt investment. Yeah. So this is 0:09:23.840 --> 0:09:27.080 a concept that I borrowed from a scholar and sovereign 0:09:27.080 --> 0:09:28.880 debt by the name of Mark Flandre, and I think 0:09:28.880 --> 0:09:33.320 he very aptly described the way capital markets worked, both 0:09:33.320 --> 0:09:35.720 in the past and the present. That is, even though 0:09:35.760 --> 0:09:40.439 you have debtors and and savers, the process of channeling 0:09:40.520 --> 0:09:43.440 those flows of capital happens, of course through the banks 0:09:43.440 --> 0:09:46.640 and the bankers and the and the investment managers that 0:09:46.760 --> 0:09:49.160 are present both in current markets as well as in 0:09:49.200 --> 0:09:52.000 the past. And that to me was a very interesting 0:09:52.600 --> 0:09:56.720 nexus of people because they were ultimately individuals with all 0:09:56.800 --> 0:10:01.720 the biases and the prejudices and the imperfections of of 0:10:01.720 --> 0:10:05.040 of individual human beings. And that's really why I wrote 0:10:05.080 --> 0:10:07.520 this as a as a history book, as a story 0:10:07.559 --> 0:10:11.720 of people trying to feel their way through very difficult 0:10:11.760 --> 0:10:15.200 and imperfect markets at at really a pivotal moment in 0:10:15.240 --> 0:10:17.360 world history. So one of the things that comes out, 0:10:17.440 --> 0:10:21.400 for example, is the degree to which national biases and 0:10:21.440 --> 0:10:25.040 patriotism at a time of geopolitical tension and ultimately war, 0:10:25.679 --> 0:10:28.520 fed through to investment decision making, and how this wasn't 0:10:28.559 --> 0:10:32.800 just a story of clinical analyzes of of balance sheets 0:10:32.920 --> 0:10:37.440 or of macroeconomic accounts, but rather also of humans trying 0:10:37.480 --> 0:10:42.439 to think their way through very confusing and fuzzy market environments. 0:10:42.840 --> 0:10:46.920 You talk about these gatekeepers, but what specifically were the 0:10:47.000 --> 0:10:51.280 decisions that they made that we're so pivotal in getting 0:10:51.559 --> 0:10:55.120 flow funds to Russia. So there were several um In 0:10:55.200 --> 0:10:57.640 one instance in early nineteen o six, when the Russian 0:10:57.679 --> 0:11:00.480 government was really on the ropes financially aking, and on 0:11:00.520 --> 0:11:04.480 the verge of having to suspend convertibility of of rubles 0:11:04.480 --> 0:11:08.320 into gold, the bankers stepped in with a very key loan, 0:11:08.360 --> 0:11:11.560 which at the time was the largest ever recorded in history. 0:11:12.000 --> 0:11:16.480 And this really happens because of two bankers, in particular 0:11:16.600 --> 0:11:20.600 in Paris and London respectively, who had cultivated relations with 0:11:20.679 --> 0:11:24.400 the Russian finance Ministry, which the ministry levered to great 0:11:24.400 --> 0:11:28.360 effects in nine six. Another example is the opening of 0:11:28.400 --> 0:11:31.680 the first branch of what is now City Group in 0:11:31.800 --> 0:11:35.719 Russia in early nineteen seventeen, the very year of the revolution. 0:11:36.360 --> 0:11:39.839 And again reading the correspondence that the bank had internally, 0:11:40.240 --> 0:11:44.200 it's very evident that this was a decision that came 0:11:44.320 --> 0:11:46.920 to a large part because of the man on the 0:11:46.920 --> 0:11:50.480 ground and his feelings about Russia and its prospects, not 0:11:50.559 --> 0:11:54.880 only long term, but because of a sense of almost 0:11:54.880 --> 0:11:58.240 responsibility on the part of the US towards Russia and 0:11:58.240 --> 0:12:01.000 on the part of an American businessman to words his 0:12:01.080 --> 0:12:04.240 Russian counterparts at a time of war. Yeah, I love 0:12:04.320 --> 0:12:07.080 that anecdote because it's just amazing to think that City 0:12:07.440 --> 0:12:11.240 was opening a branch on the eve of the Russian Revolution. 0:12:11.840 --> 0:12:14.280 On that note, you know, you just mentioned the loan 0:12:14.520 --> 0:12:18.040 that basically saved Russia in nineteen o five or nineteen 0:12:18.040 --> 0:12:24.720 o six. Why did investors hold on for so long 0:12:24.840 --> 0:12:28.280 and why didn't they push the Czarist government for more 0:12:28.360 --> 0:12:33.360 reform after they extended that loan. It's a great question, 0:12:33.400 --> 0:12:37.560 and it's got a very complicated dynamic behind it. In 0:12:37.679 --> 0:12:42.200 one sense, there were conflicting arguments both in favor of 0:12:42.440 --> 0:12:45.520 and against extending loans. One argument, of course, is it's 0:12:45.520 --> 0:12:51.440 an anti democratic government and supporting them will just encourage 0:12:51.480 --> 0:12:55.280 bad behavior, and other arguments counter to that was that 0:12:55.360 --> 0:13:00.440 actually engagement is how one pushed development and ultimately a 0:13:00.440 --> 0:13:04.880 better direction in Russian policymaking. The other story, of course here, 0:13:04.880 --> 0:13:07.559 and this is where the gatekeepers were not just bankers 0:13:07.600 --> 0:13:11.040 but also ministry officials in Russia itself, was that the 0:13:11.080 --> 0:13:16.120 Russian government became very adept at leveraging the exposure that 0:13:16.200 --> 0:13:19.839 foreign governments and banks had to the Russian economy to 0:13:19.960 --> 0:13:23.200 great effects. So by the time the nineteen o six 0:13:23.320 --> 0:13:26.960 loan came up for discussion, the French had already invested 0:13:27.000 --> 0:13:30.640 so significantly into Russia that it really becomes a question 0:13:30.800 --> 0:13:33.079 of whether it was the creditors that had more power 0:13:33.120 --> 0:13:53.319 over the debtor or vice versa. I love Tracy's question 0:13:53.440 --> 0:13:56.760 about why didn't the investors in these bonds pushed more 0:13:56.800 --> 0:13:59.520 reform because it seems like such a modern question, And 0:13:59.559 --> 0:14:03.080 I'm imagining like all the same reform talk we hear 0:14:03.120 --> 0:14:05.520 about in E M these days, about like like with 0:14:05.600 --> 0:14:08.320 the I M F. Yeah, and you know, cutting pension 0:14:08.360 --> 0:14:12.560 obligations and privatizing state owned power plants and all these 0:14:12.559 --> 0:14:15.960 things that constitute reform these days. What does that mean though, 0:14:16.000 --> 0:14:20.760 Like what were the things that would have constituted reform 0:14:20.800 --> 0:14:23.240 in the early nine hundred, Like, what was it? What 0:14:23.280 --> 0:14:26.080 were the equivalent of those things? Well, it's funny you 0:14:26.080 --> 0:14:29.160 you make the comparison with today, because in many ways, 0:14:29.360 --> 0:14:33.560 a lot of the discussion points were very similar. The 0:14:33.640 --> 0:14:38.440 same things that we think about as problematic in Russia 0:14:38.480 --> 0:14:41.040 today and that are often ascribed to the Soviet past. 0:14:41.120 --> 0:14:46.520 Things like corruption, bureaucracy, rule of law issues were things 0:14:46.560 --> 0:14:49.640 that investors at the time we're talking about in Russia 0:14:49.840 --> 0:14:53.320 with respect to the Czaris regime. And indeed, at the time, 0:14:53.680 --> 0:14:57.280 as we got closer to nineteen seventeen, there was such 0:14:57.280 --> 0:15:00.960 a frustration in foreign investment circles with Bizarus regime on 0:15:01.040 --> 0:15:05.720 exactly these points, rule of law, bureaucracy, inefficient policy making, 0:15:06.200 --> 0:15:08.800 that there was almost a pining for some sort of change, 0:15:09.280 --> 0:15:13.040 and in some circles even an attraction towards the revolutionaries 0:15:13.040 --> 0:15:16.320 because they promised something different. So in in the build 0:15:16.400 --> 0:15:20.680 up to nineteen seventeen, nine eighteen, what were the signs 0:15:20.840 --> 0:15:25.040 that trouble was brewing in the Russian debt market? What 0:15:25.120 --> 0:15:28.000 were the signs that the bubble was going to burst? Well, 0:15:28.040 --> 0:15:31.560 it's interesting because when the war breaks out in nineteen fourteen, 0:15:31.600 --> 0:15:34.640 there's actually kind of a rally in the Russian economy 0:15:34.640 --> 0:15:37.160 and financial markets, and this is partly because it kicked 0:15:37.160 --> 0:15:40.520 off an industrial boom because of wartime production increases and whatnot. 0:15:40.920 --> 0:15:43.120 And so really the first couple of years of the war, 0:15:43.240 --> 0:15:45.640 you see the spreads the that is, the yields on 0:15:45.760 --> 0:15:50.640 Russian government bonds relative to the the investment grade benchmark, 0:15:50.680 --> 0:15:53.880 which was British treasuries at the time, shrink to multi 0:15:54.040 --> 0:15:57.720 year and even multi decade lows in just weeks and 0:15:57.840 --> 0:16:01.600 months before the the wheel really came off in Russia. 0:16:01.760 --> 0:16:05.760 And eventually what you started to see worth indicators in 0:16:05.800 --> 0:16:08.560 the real economies start to turn over. If you look 0:16:08.600 --> 0:16:11.240 at the primary market data from when the Russian government 0:16:11.280 --> 0:16:15.160 was issuing new bonds into the market despite their attempts 0:16:15.160 --> 0:16:19.480 at financial repression, you start to see more onerous terms 0:16:19.480 --> 0:16:21.480 that the debt markets are inflicting on the on the 0:16:21.560 --> 0:16:24.960 Russian government. But really, until very very quite late in 0:16:25.000 --> 0:16:29.120 the game, bond market participants weren't really showing signs of alarm. 0:16:29.160 --> 0:16:31.280 In fact, one of the things that I was shocked 0:16:31.320 --> 0:16:34.080 by was that even after the moment of default, when 0:16:34.080 --> 0:16:38.080 the yields explode, they explode quite dramatically, But when you 0:16:38.120 --> 0:16:41.800 compare them to relatively recent defaults that had happened in 0:16:41.840 --> 0:16:45.480 the time and in Argentina and Greece, the spreads hadn't 0:16:45.480 --> 0:16:48.280 been blown out to those levels, which indicated to me 0:16:48.360 --> 0:16:51.360 that investors still held out more hope in Russia even 0:16:51.400 --> 0:16:54.400 after the communists takeover than they had held out in 0:16:54.480 --> 0:16:57.440 Greece and Argentina in the late nineteenth century. It is 0:16:57.640 --> 0:17:01.160 pretty remarkable I think back, you know, to some of 0:17:01.160 --> 0:17:05.600 these more recent defaults. Like obviously, people, you know, we 0:17:05.680 --> 0:17:09.119 recognize the various political things that go on in these 0:17:09.160 --> 0:17:12.560 countries that precede the default, but there's a lot of 0:17:12.600 --> 0:17:17.240 focus still despite that, on sort of pure attempts to 0:17:17.359 --> 0:17:21.600 quantify debt sustainability within any of these countries, and they 0:17:21.640 --> 0:17:25.560 fixate on, you know, debt to GDP and primary surpluses 0:17:25.640 --> 0:17:29.679 or primary deficits or cyclically adjusted surpluses, these sort of 0:17:29.760 --> 0:17:34.360 attempts to, yeah, just put into numbers how sustainable a 0:17:34.359 --> 0:17:37.639 country's debt is. And I'm always sort of skeptical about 0:17:37.680 --> 0:17:41.080 the value of those numbers in the modern situation. But 0:17:41.160 --> 0:17:44.320 I'm curious, like what the tensions and the lead up 0:17:44.320 --> 0:17:48.440 to the Russian default tells us about what indicators are 0:17:48.520 --> 0:17:52.159 actually of any use when trying to assess that the 0:17:52.320 --> 0:17:55.760 end game is NI. Yeah, that's that's a great question. 0:17:55.800 --> 0:17:58.960 I mean. One of the things that is different from 0:17:59.320 --> 0:18:01.720 in the past key versus today, is at the time, 0:18:02.359 --> 0:18:06.280 the macroeconomic accounts were both simpler and different in terms 0:18:06.280 --> 0:18:09.080 of what investors would look at. So, for example, they 0:18:09.080 --> 0:18:12.560 didn't have access to statistics like GDP because they weren't 0:18:12.560 --> 0:18:15.800 really thought of in those terms back then. What they 0:18:15.840 --> 0:18:19.840 did look at, not unlike today, are things like export 0:18:19.960 --> 0:18:22.800 numbers and and a rough proxy for the current account 0:18:22.840 --> 0:18:27.120 position in a country. There was a consciousness about the 0:18:27.240 --> 0:18:29.879 level of debt, both in in absolute terms and in 0:18:29.960 --> 0:18:33.080 relative terms. But I have to say the Russian finance 0:18:33.160 --> 0:18:37.679 ministry did a good number by shifting the the accounting 0:18:37.680 --> 0:18:41.800 around such that they created two different budgets, an ordinary 0:18:41.880 --> 0:18:46.199 quote unquote budget and extraordinary budget. And there was a 0:18:46.280 --> 0:18:50.200 lively debate in investment circles about which numbers investors should 0:18:50.240 --> 0:18:53.960 be looking at. And also another complicating factor was at 0:18:54.000 --> 0:18:56.959 the time of war, investors that may have looked at 0:18:57.000 --> 0:19:02.119 hard nosed analyzes of raw numbers started also including in 0:19:02.160 --> 0:19:06.159 their thinking things like Russia's alliance with the West at 0:19:06.160 --> 0:19:08.640 the time of the war and the long term prospects 0:19:08.640 --> 0:19:10.920 of Russia, saying that even if right now things look 0:19:11.040 --> 0:19:14.520 rather stressed over the next hundred years, say, Russia still 0:19:14.560 --> 0:19:17.119 has a good future ahead of it, which brings to 0:19:17.119 --> 0:19:21.480 to mind the saying that every long term investment is 0:19:21.520 --> 0:19:25.480 really a speculation gone bad. It's almost like an intangible 0:19:25.520 --> 0:19:28.240 asset for a company, right you're sort of factoring the 0:19:28.359 --> 0:19:32.840 sort of I guess, like aura around the country. Okay, 0:19:32.840 --> 0:19:37.200 So Hassan talked to us about the moment of debt repudiation. 0:19:37.359 --> 0:19:40.800 You know, we're building up to nineteen eighteen. What was 0:19:40.880 --> 0:19:45.960 the decision making process that went into, ultimately the decision 0:19:46.040 --> 0:19:49.200 to just repudiate all the debt that had been issued 0:19:49.280 --> 0:19:52.240 under the Czar's government. So one of the things that 0:19:52.320 --> 0:19:55.199 really struck me when I was reading through all the 0:19:55.280 --> 0:19:58.560 archival material on this was the degree to which this 0:19:58.840 --> 0:20:03.440 was a a very complicated decision. There is a tendency 0:20:03.480 --> 0:20:06.240 in the histories that have come out on this period 0:20:06.280 --> 0:20:09.560 to just write this off as of course the Communists 0:20:09.560 --> 0:20:12.639 came in and of course they defaulted. In reality, it 0:20:12.720 --> 0:20:17.000 was a very complicated decision because, yes, the communists hated 0:20:17.280 --> 0:20:20.440 the bankers and the financiers and the capitalists, but there 0:20:20.440 --> 0:20:23.160 were also some so there was, you know, this ideological 0:20:23.200 --> 0:20:26.840 backdrop to it, but there was also some very practical considerations. 0:20:26.840 --> 0:20:29.960 So one of the things was the revolutionaries basically had 0:20:30.000 --> 0:20:33.120 their support in urban centers, and many of them were 0:20:33.119 --> 0:20:35.800 really not representative of Russia as a whole, which was 0:20:35.800 --> 0:20:38.680 still a very agrarian country. So coming in and talking 0:20:38.680 --> 0:20:42.280 about repudiating the debts was a very shrewd way of 0:20:42.480 --> 0:20:46.600 building support amongst the peasantry, which had run up mortgage 0:20:46.640 --> 0:20:49.800 debts in the process of land reform that had preceded 0:20:49.840 --> 0:20:53.959 the revolution. There's also the counter factual situation, which is 0:20:54.480 --> 0:20:58.920 that if the Bolshevik Revolution had not succeeded in late 0:20:59.000 --> 0:21:02.480 nineteen seventeen, and there's plenty of reason to argue that 0:21:02.520 --> 0:21:05.040 it could not have succeeded in a different scenario because 0:21:05.040 --> 0:21:07.359 it was such a closely run thing. You have to 0:21:07.400 --> 0:21:10.679 ask yourself what would a different government have done. And 0:21:10.720 --> 0:21:12.600 one of the arguments that I make in the book 0:21:12.840 --> 0:21:15.000 is that if you look at the numbers, and if 0:21:15.040 --> 0:21:17.520 you look at the situation and how badly the Russian 0:21:17.520 --> 0:21:21.080 economy had started to perform by late nineteen seventeen, that 0:21:21.200 --> 0:21:26.320 even a more pro western, even a more liberal government 0:21:26.840 --> 0:21:30.520 at the time, would have had to default. And so it's, yes, 0:21:30.680 --> 0:21:34.280 partly a story of this ideology, but partly it's also 0:21:34.520 --> 0:21:37.159 a story of practicality. And the other thing that I 0:21:37.160 --> 0:21:39.399 would say is that at the time that the Bolshicks 0:21:39.480 --> 0:21:43.480 came in, they really inherited the keys to essentially the 0:21:43.560 --> 0:21:46.360 largest country on Earth, and they were so taken up 0:21:46.840 --> 0:21:50.720 by the mechanics of running this large country that it 0:21:50.760 --> 0:21:54.479 took quite some time. Took a number of weeks before 0:21:54.520 --> 0:21:58.320 they were actually able to issue a decree repudiating the 0:21:58.400 --> 0:22:01.440 debts which also created its own levels of confusion and 0:22:01.440 --> 0:22:04.560 and and uncertainty in the market. I know we talked 0:22:04.560 --> 0:22:07.479 about how big this was, but what are the numbers, like, 0:22:07.680 --> 0:22:10.679 how big was Russia, you know, in terms of the 0:22:10.840 --> 0:22:13.639 nominal amount of outstanding debt and how much of a 0:22:13.760 --> 0:22:16.840 slice of the credit markets or sovereign bond market were 0:22:16.880 --> 0:22:20.399 they at the time? Right, so they were the largest 0:22:20.480 --> 0:22:23.639 international debtor on a net basis on the eve of 0:22:23.680 --> 0:22:26.399 the war. The US was larger on a growth basis, 0:22:26.480 --> 0:22:28.159 but they would then re export a lot of the 0:22:28.200 --> 0:22:32.120 capital elsewhere in frankly and emerging markets. If you look 0:22:32.160 --> 0:22:35.760 at default in roughly contemporary terms and sort of late 0:22:37.359 --> 0:22:40.920 sort of dollars, you're looking at at a default size 0:22:41.119 --> 0:22:45.240 that can easily be put at three billion dollars. But really, 0:22:45.280 --> 0:22:49.959 given the size of Russia's economy and given the size 0:22:50.000 --> 0:22:52.080 of the debt at the time, if you translated to 0:22:52.240 --> 0:22:56.359 some other inflation metrics, you could easily make the argument 0:22:56.400 --> 0:22:58.800 that this was on the scale of a trillion dollar default, 0:22:59.600 --> 0:23:04.520 which underscores the gap between Russia nineteen eighteen and Greece 0:23:04.560 --> 0:23:07.960 and Argentina more recently. What were then the knock on 0:23:08.000 --> 0:23:10.880 effect for the bag holders, so to speak, because even 0:23:10.920 --> 0:23:14.119 with Greece, which was, you know, so much smaller, there 0:23:14.160 --> 0:23:18.320 are all these fears about contagion throughout the entire financial system, 0:23:18.400 --> 0:23:22.680 and that the system couldn't handle an outright Greek default. 0:23:23.000 --> 0:23:26.320 What happened with the holders and who bore the brunt 0:23:26.320 --> 0:23:29.920 of it? Well, really, this is one of the tragic stories, 0:23:30.040 --> 0:23:32.640 is that a lot of the people that got hit 0:23:32.680 --> 0:23:35.360 by this were ordinary savers in the West. I mean 0:23:35.440 --> 0:23:38.679 when I when I talked to my French colleagues in 0:23:38.720 --> 0:23:42.800 the markets today, many of them have stories of grandparents 0:23:42.800 --> 0:23:46.360 and great grandparents who are rendered destitute by the default. 0:23:46.720 --> 0:23:50.280 There's to this day internet for a of descendants of 0:23:50.320 --> 0:23:54.080 French bond holders that are still demanding restitution. There were 0:23:54.080 --> 0:23:57.680 a series of deals that were done, so in one 0:23:57.720 --> 0:24:03.200 deal that was consummated in six bondholders essentially got four 0:24:03.280 --> 0:24:07.359 cents on the dollar um. None of this was inflation adjusted, 0:24:07.680 --> 0:24:09.639 and so really it was a story of individuals that 0:24:09.760 --> 0:24:12.160 lost out rather than the big institutions. And of course 0:24:12.200 --> 0:24:16.359 the biggest sufferers were people in Russia themselves, who entered 0:24:16.400 --> 0:24:20.160 this sort of monetary twilight zone of a collapsing real 0:24:20.160 --> 0:24:24.960 economy and hyper inflation. So, Hassan, what's the big takeaway 0:24:25.280 --> 0:24:29.520 for emerging market debt? Can you say that all bonds 0:24:29.560 --> 0:24:33.320 are all debt is political or ideological or is that 0:24:33.400 --> 0:24:39.719