Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.
Speaker 1: I'm Tracy Allaway and I'm Joe. Did you know that
Speaker 1: I have a sort of side hobby in the history
Speaker 1: of Russian debt? I thought it was Chinese debt. It's both.
Speaker 1: Actually they kind of fit together, um for reasons that
Speaker 1: I could tell you about much later on. But it's
Speaker 1: a really interesting topic all around and throughout history. Russian
Speaker 1: debt has, you know, for at least a couple of times,
Speaker 1: sort of burst into the public consciousness, the first time
Speaker 1: in the early nineteen hundreds with the eighteen default on
Speaker 1: Czarist imperial bonds, and then with another I think it
Speaker 1: was a near default in the end on Brady bonds
Speaker 1: that were issued by Russia. And now we're in another moment,
Speaker 1: moment where it seems like everyone's going to be talking
Speaker 1: about Russian debt yet again, are there other holders of
Speaker 1: those early who are obscure courts somewhere trying to collect? Uh?
Speaker 1: There are a lot of investors who throughout the years
Speaker 1: have tried to collect on Czarist imperial debt. Yes, but
Speaker 1: we have to talk about what's happening right now, which
Speaker 1: could also lead to a protract protracted series of litigation
Speaker 1: in various courts. But we're recording this on Wednesday, March sixteen,
Speaker 1: and it is the day that Russia is supposed to
Speaker 1: be paying about a hundred seventeen million dollars worth of
Speaker 1: interest on two dollar bonds. And the question is not
Speaker 1: only is it going to be able to pay those bonds,
Speaker 1: but what happens on other types of bonds? Is it
Speaker 1: going to pay those out in rubles? Are those going
Speaker 1: to constitute a default? What jurisdiction, could litigation actually happen
Speaker 1: in There are so many questions and swirling around this depth. Well,
Speaker 1: to me, part of the question is like, okay, what
Speaker 1: we think of a country defaulting on its bonds and
Speaker 1: then it goes in It gets punished by the market
Speaker 1: in some way, it's out of the market for a
Speaker 1: long time. Investors don't want to touch it. But it
Speaker 1: feels like in the case of Russia, due to the
Speaker 1: sanctions and the voluntary sanctions, it's already been cut off
Speaker 1: from the world. I mean, it's hard to imagine what
Speaker 1: is the scenario enrich Russia gets more cut off from
Speaker 1: the world. Part of me is wondering, even if as
Speaker 1: they do pay bonds. How given the cut off of
Speaker 1: you know, banks and other financial intermediaries, so how literally
Speaker 1: do you make the payment? Obviously, they're the questions of
Speaker 1: does Russia even have the hard courrege here of the
Speaker 1: access after having lost so much access to uh its
Speaker 1: f X reserves. So there are all kinds of reasons
Speaker 1: why obviously the default is in question, or the sort
Speaker 1: of question about payments, but also like what does it
Speaker 1: even mean to default in this environment? Right? And do
Speaker 1: the normal sort of mechanisms of push and pull actually apply.
Speaker 1: Um So I'm very pleased to say that we really
Speaker 1: do have the perfect guests to talk about this. We
Speaker 1: are going to be speaking with Mittu Kulati. He's a
Speaker 1: professor of law at University of Virginia. He's also been
Speaker 1: on the show i think a number of times at
Speaker 1: this point and is an all round expert in the
Speaker 1: topic of sovereign debt. We also have Mark Wedemeyer. He
Speaker 1: is a professor of law at University of North Carolina.
Speaker 1: So thank you so much to you both for coming
Speaker 1: on all thoughts, You're welcome, thanks for having us. So
Speaker 1: maybe we should just start with a big picture question,
Speaker 1: how unusual is the situation that we currently find ourselves
Speaker 1: in when it comes to Russian debt, are there any
Speaker 1: historic parallels that we can look to? You know, I
Speaker 1: mentioned Russia has defaulted on its a couple of times previously,
Speaker 1: But how much do those historic situations actually apply to
Speaker 1: the current events. It is him think to say that
Speaker 1: there aren't historical precedents, and there probably isn't anything directly
Speaker 1: on point, although maybe Mark will correct me, since he
Speaker 1: knows bits of this history a lot better than I do.
Speaker 1: But in the last century, in the century prior, where
Speaker 1: there was lots of sovereign debt being issued, most sovereign
Speaker 1: debt was issued in order to finance wars, and when
Speaker 1: war would break out, some countries stopped paying because they
Speaker 1: had to use the money to fight wars, or they
Speaker 1: stopped paying because some of the investors were located in
Speaker 1: the country that it was fighting against. So many of
Speaker 1: the questions that we are asking today literally today, did
Speaker 1: come up and were analyzed by the leading international law
Speaker 1: experts of the time. It's just that it was over
Speaker 1: a hundred years ago and today we've all forgotten what
Speaker 1: those answers were. Now, those of us who are concerned
Speaker 1: about this are busy dredging up are really old international
Speaker 1: law books to figure out what happens in this context.
Speaker 1: But I don't know if Mark has at different read
Speaker 1: of this history. No, I think that that's right. I
Speaker 1: think that the difference here is that we have kind
Speaker 1: of forgotten in the modern world just how much geopolitical
Speaker 1: tension sometimes companies. Uh, let's assume by the time your
Speaker 1: listeners here this, there's been a Russian default. We've kind
Speaker 1: of forgotten how much geopolitical tension often is associated with that.
Speaker 1: And we've gotten used to thinking about private creditors and
Speaker 1: their enforcement rights, and what the role of litigation is
Speaker 1: and so forth, and so in some ways, what's unique
Speaker 1: about this is the combination of those two things. Explain
Speaker 1: that further. I mean, you know, it's easy to think
Speaker 1: of some of the potential locations. Obviously, there's the sanctions
Speaker 1: you mentioned, the role of private creditors, their ability ability
Speaker 1: to enforce their payout. I mean, it's inconceivable, I guess,
Speaker 1: to even imagine what a jurisdiction or what court things
Speaker 1: would apply at these days with the sanctions. But talk
Speaker 1: to us a little bit more about how complicated this
Speaker 1: situation is. From a historical perspective. Well, it's it's it's
Speaker 1: complicated in all kinds of ways. One of them is
Speaker 1: that you've got, at the one point, this really tempting
Speaker 1: set of targets Russian assets that are frozen abroad, assets
Speaker 1: belonging to agents who are maybe acting on behalf of
Speaker 1: the Russian government. And yet you know, the reality is
Speaker 1: nobody who is a creditor of the government is going
Speaker 1: to be able to find enough assets to sees and
Speaker 1: to force the sale of and to get their claim
Speaker 1: paid in full. And this is a game for patient creditors,
Speaker 1: the gamble, as you can be enough of a pain
Speaker 1: in the butt to a country for long enough that
Speaker 1: it will decide it's better off paying you than it
Speaker 1: is to keep fighting. And you know, recent historical experience
Speaker 1: suggests the Russians are plenty capable of out waiting even
Speaker 1: the most determined kinds of creditors. So the the question
Speaker 1: is whether you expect to be able to to change
Speaker 1: that calculus in the in the near future. Can I
Speaker 1: ask Mark a question that my students have been asking me. Mark,
Speaker 1: I know you are literally the world's leading expert on
Speaker 1: this concept of veil piercing in the sovereign debt context,
Speaker 1: can creditors, even at a low probability UH estimation, go
Speaker 1: after any of the oligarch assets. My sense from reading
Speaker 1: your writing is this is not utterly implausible, but I
Speaker 1: haven't asked you the questions, so I'm asking you here
Speaker 1: it is not utterly implausible. But one way to kind
Speaker 1: of set a baseline here is to recognize that there
Speaker 1: have been creditors the for the UK shareholders and others
Speaker 1: who have been doing exactly this thing, going after Russian
Speaker 1: state owned enterprises, going after individuals for years and years
Speaker 1: and years on this theory that these other people were
Speaker 1: really the alter egos of the Russian government, and for
Speaker 1: the most part they have struck out. So I guess
Speaker 1: the question I would be asking myself if I were
Speaker 1: a creditor now is whether I think courts are going
Speaker 1: to be more receptive to that argument, both because the
Speaker 1: tensions between the of the home states of these courts
Speaker 1: and the Russian government men are so much greater, but
Speaker 1: also maybe courts are going to be more aware of
Speaker 1: how the Russian government acts through intermediaries abroad. If you
Speaker 1: think that courts are suddenly going to get more receptive
Speaker 1: to those arguments, then you know, maybe this seems like
Speaker 1: a much more appealing prospect, but it hasn't had any
Speaker 1: luck so far. I want to get into a lot
Speaker 1: of these jurisdiction questions, but maybe before we do, we
Speaker 1: could talk a little bit about what Russian debt actually
Speaker 1: is and how it's structured, because I think the country
Speaker 1: as a whole has about a hundred fifty billion in
Speaker 1: foreign currency debt, and that's issued by the government and
Speaker 1: you know, big companies like gas Prom, But within the
Speaker 1: subset of bonds actually issued by the Russian sovereign there
Speaker 1: are different types of debt, and this is something that
Speaker 1: the market is starting. It seems to focus on the
Speaker 1: difference between certain bonds versus others. And some of these
Speaker 1: bonds have something called, you know, an alternative payment currency
Speaker 1: event clause, which a lot of people are digging into
Speaker 1: at the moment. Could you maybe explain to us exactly
Speaker 1: what that looks like and how normal it is to
Speaker 1: see those in a sovereign debt. So these clauses are
Speaker 1: are not normal at all. And we looked a lot
Speaker 1: at the Russian debt, Russian Ukrainian debt at the time
Speaker 1: of the Crimean invasion two fourteen, and we realized then
Speaker 1: that some of these terms and that was debt that
Speaker 1: Russia had lent to the the dictator in Ukraine at
Speaker 1: the time in order to prop him up. And we
Speaker 1: realized then that desponds wild structured as international euro bonds,
Speaker 1: have some weird clauses in them, unusual. And you guys
Speaker 1: know this market, this is a market completely dominated by boilerplate,
Speaker 1: where it's just cut and paste transactions that don't take
Speaker 1: more than a few minutes. And we knew then that
Speaker 1: Russia was doing weird things. Now, this alternate payments clause,
Speaker 1: I have only seen it in the recent Russian bonds. Literally,
Speaker 1: the bonds issued after the Crimean invasions seem to have
Speaker 1: a clause in them that anticipates Russia misbehaving and sanctions
Speaker 1: being increased. I mean, it is astonishing to read the
Speaker 1: risk disclosures in these bonds. I think there's something like
Speaker 1: seven or eight pages. Uh, and Mark can correct me,
Speaker 1: seven or eight pages talking about all the bad things
Speaker 1: that Putin has done, invade here, you know, take over
Speaker 1: their human rights violation somewhere else, and telling investors, look,
Speaker 1: you know there might be sanctions, and if there are sanctions,
Speaker 1: we're gonna pay in rubles. As Mark articulated it to
Speaker 1: me a couple of days ago, it's as if the
Speaker 1: investors are, uh, I'm giving putin insurance for doing bad stuff,
Speaker 1: and that the true irony is that many of these
Speaker 1: investors are the ones who have been running around touting
Speaker 1: their E. S G. Cred and at the same time
Speaker 1: they're giving putin insurance to you know, take over Ukraine.
Speaker 1: Now I'm I'm probably overstating this, but yes, these clauses
Speaker 1: are very weird, and there are a form of insurance
Speaker 1: protection for Russian misbehavior. You know, it's interesting to hear
Speaker 1: the nature of these bonds issued after the annexation of Crimea.
Speaker 1: And I guess the degree to which that incident that
Speaker 1: hostile uh, that hostile act did not seem to phase uh,
Speaker 1: so many players across the rest of Europe. And I'm
Speaker 1: thinking also about a recent episode that we did on
Speaker 1: natural gas and you think, okay, that could have been
Speaker 1: a moment where say, you know, countries decided, well maybe
Speaker 1: we shouldn't be some reliant on Russian natural gas. Uh.
Speaker 1: Nothing changed. And now if you're describing kind of the
Speaker 1: same phenomenon where you say these E s G. Minded
Speaker 1: investors saw the annexation. Then Russia went on to put
Speaker 1: in these clauses. Can you just can you talk a
Speaker 1: little bit about more what specifically are in these clauses,
Speaker 1: what do they say, and then what do they mean
Speaker 1: right now? And I shouldn't know just briefly for those
Speaker 1: who don't have a terminal looking at terminal, and I
Speaker 1: don't know about the specifics here, but you know, obviously
Speaker 1: Russian bond prices have been absolutely killed. Dollar bonds that
Speaker 1: were over a hundred on the dollar at the beginning
Speaker 1: of February now around eleven sends, some more short term
Speaker 1: euro bonds UH in the thirties. So just for the
Speaker 1: context here, all types of you know, Russian Russian liabilities
Speaker 1: having been killed. But why don't we talk more specifically
Speaker 1: about what is in these clauses and what they mean
Speaker 1: for for lenders. Basically, the clauses say that if for
Speaker 1: reasons beyond Russia's control, I don't know if that's an
Speaker 1: exact quote, but it's pretty close, if for reasons beyond
Speaker 1: its control, it can't come up with whatever currency the
Speaker 1: bond is denominated in, then there's a list of kind
Speaker 1: of heart currencies that it falls back on, and if
Speaker 1: for reasons beyond its control, it can't come up with
Speaker 1: one of those, then it pays in rubles, and they don't.
Speaker 1: They don't say anything beyond that. And so the question
Speaker 1: really is for this subset of the Russian bonds, whether
Speaker 1: the sanctions regime UH and the inability to access foreign exchange,
Speaker 1: whether that it constitutes a circumstances outside Russia's control, or
Speaker 1: whether really the whole thing is within Russia's control, because
Speaker 1: they could just turn the tanks around and presumably the
Speaker 1: sanctions would be lifted. There's something else that's in the
Speaker 1: bonds that's relatively unusual, or I should say there's something
Speaker 1: that's lacking in the bonds. Um, it doesn't include a
Speaker 1: waiver of immunity, I think, or a clause that sort
Speaker 1: of submits to the jurisdiction of foreign courts. Can you
Speaker 1: explain exactly what that means and how it relates to
Speaker 1: you know, for instance, if Russia said, um, it can't
Speaker 1: necessarily do this today, but on future payments, if it said, well,
Speaker 1: for reasons outside of our control, we're going to pay
Speaker 1: these bonds in rubles instead of dollars or euros, and
Speaker 1: then foreign investors decide, hey, we don't like that. We're
Speaker 1: going to take Russia to court to argue against this.
Speaker 1: What does it mean from a jurisdictional perspective are they
Speaker 1: going to be able to do that? So this is
Speaker 1: the perfect follow up question to what Joe asked. So
Speaker 1: you have this clause that, as Mark described, says, you know,
Speaker 1: if for reasons beyond our control, uh, we are unable
Speaker 1: to pay in dollars franks, uh um euros, we'll pay
Speaker 1: you in brubles. But the contract doesn't say who gets
Speaker 1: to determine beyond control? I mean, does putin get to determine? Oh,
Speaker 1: I've I've decided you can't pay in dollars anymore. So
Speaker 1: it's beyond the control of the treasury to pay. And
Speaker 1: normally when you would have a question like this, the
Speaker 1: place you would go is you would go to the
Speaker 1: jurisdiction clause and the bonds to see where do these
Speaker 1: cases get brought? Where has the sovereign submitted to jurisdiction,
Speaker 1: Where has it waived its immunity and these bonds again,
Speaker 1: and this is unusual again, and it is our fault
Speaker 1: for not noticing this or paying greater attention to this
Speaker 1: before the clauses explicitly say we have not submitted to
Speaker 1: jurisdiction anywhere. And the clauses explicitly say we have not
Speaker 1: weve sovereign immunity. Now here's the twist, though, I think
Speaker 1: on first reading, if you are not a jurisdiction specialist,
Speaker 1: you would think okay. So basically they can't be taken
Speaker 1: into court anywhere. They have not waved sovereign immunity and
Speaker 1: they don't submit to jurisdiction anywhere. That is wrong because
Speaker 1: if you go out and reach investors and sell them
Speaker 1: dollar bonds or you send them Euro bonds, and you
Speaker 1: do that in New York or London, even though you
Speaker 1: say I don't agree to jurisdiction anymore, the courts there
Speaker 1: can say, hey, you came into our jurisdiction, you sold investor.
Speaker 1: Response here we are taking jurisdiction and you're engaged in
Speaker 1: commercial activity, so we are deeming you to have waves
Speaker 1: sovereign immunity. So in a sense, Russia might think that
Speaker 1: they haven't consented to any of these court jurisdiction, but
Speaker 1: I think that would be wrong. Can I ask, what
Speaker 1: is the consequence of actually defaulting? So Russia may have
Speaker 1: means at its disposal to avoid technically defaulting. Okay, doesn't
Speaker 1: pay in dollars or some other hard currency, but it
Speaker 1: pays in rubles, so okay, technically it avoids default. But again,
Speaker 1: you know, in the context of this very unusual situation,
Speaker 1: what does that even mean Because normally we think about,
Speaker 1: you know, sort of catastrophic consequences for a country that
Speaker 1: doesn't pay. Uh, it's for creditors. But in this situation,
Speaker 1: Russia is already dramatically cut off in a way that's
Speaker 1: far worse than what we would expect to see any
Speaker 1: sovereign debt or experience in the event of a default.
Speaker 1: So this is the hard question. I think that investors
Speaker 1: are faith sing. It's kind of hard to know what
Speaker 1: to make of the Let's assume again that there has
Speaker 1: been a default by the time the episode airs. Your choices,
Speaker 1: I could accelerate the bond and I could decide I'm
Speaker 1: going to go to court, as me Too says, I
Speaker 1: can probably convince a court in London or maybe New
Speaker 1: York to take jurisdiction. But if I do this, I'm
Speaker 1: in it. For the long haul. You know, I'm I'm
Speaker 1: gonna I've picked my path, and I'm gonna be fighting
Speaker 1: with the Russian government for god knows how many years
Speaker 1: into the future. Or I can sit around and I
Speaker 1: can hope that this thing resolves in a way that
Speaker 1: allows for the resumption of payments. I have to think
Speaker 1: that for most investors, maybe not for the die hard
Speaker 1: subset who liked the litigation game, but for most investors,
Speaker 1: going to court and accelerating the dead is a pretty
Speaker 1: unappealing prospect right now. But we'll see it. The longer
Speaker 1: this drags out, the more that calculus might change me too.
Speaker 1: I don't know, maybe you have a different view of it. No.
Speaker 1: In fact, my view in some ways, unless Mark you
Speaker 1: figure out a way we could start attaching those oligarch assets,
Speaker 1: is that if you're really only chasing the Russian state. Uh,
Speaker 1: this is difficult, and we could probably take some lessons
Speaker 1: here from the attempts of jilted investors to chase after
Speaker 1: the Russian state for expropriation in the Yukost case. Uh this,
Speaker 1: you know, I think bond investors haven't really paid very
Speaker 1: much attention to this, But there's basically, I think it's
Speaker 1: upwards of sixty billion dollars in claims that for which
Speaker 1: jilted investors have received judgments against Russia, and Russia just
Speaker 1: have no intention of paying, and the markets don't seem
Speaker 1: to have penalized Russia for this uh in the recent past,
Speaker 1: continuing to believe, oh, maybe they'll behave well with respect
Speaker 1: to the bonds, even though they're behaving so badly with
Speaker 1: respect to other claims. And you know that. I mean,
Speaker 1: this is what we all talked to our students about
Speaker 1: reputational consequences and how the sovereign debt market is. UH,
Speaker 1: it is such a robust reputational market, it might mean,
Speaker 1: you know, the the recent experience maybe makes us think
Speaker 1: that's complete ble. I mean, you sort of touched on
Speaker 1: this um before, But when we talk about going after
Speaker 1: oligarch's assets, I'm getting flashbacks to you know, Paul Singer
Speaker 1: seizing at Argentine boat and stuff like that. To what
Speaker 1: extent could it be possible that the legal industry they're
Speaker 1: less sympathetic to Russia in this context, or that they
Speaker 1: harden up their view of Russia and it does become
Speaker 1: easier to pursue those assets. I mean, to some extent,
Speaker 1: we've already seen this, right, A lot of things have
Speaker 1: changed over the past two weeks. Things that we thought
Speaker 1: were difficult to push through legally seemed to have been
Speaker 1: done very quickly. And if they're not done purely through
Speaker 1: the law, they've been done through self sanctioning and companies
Speaker 1: and people voluntarily cutting Russia out of the system. So
Speaker 1: I'm just wondering, is there the possibility that it begins
Speaker 1: to change? Yes, Now, what I handicap that possibility? Uh? No,
Speaker 1: I I or at least I wouldn't know how to
Speaker 1: do it. But if you think about some of the
Speaker 1: recent developments that might be relevant here, they're actually not
Speaker 1: what one would expect from the usual kind of credit
Speaker 1: or activity. They're not courts being a little more receptive
Speaker 1: to assets. There are things like the U. S. Government
Speaker 1: just deciding that it's gonna use bunch of Afghan Central
Speaker 1: Bank assets to pay some creditors. You know that the
Speaker 1: this is why the geopolitics actually matters quite a lot.
Speaker 1: It's not clear to me that the real way to
Speaker 1: get at Alagur assets here is you convince a court
Speaker 1: that they're the alter ego of the Russian government and
Speaker 1: you attach them and you have an execution sale. But
Speaker 1: governments are coming mighty close to just expropriating assets when
Speaker 1: they feel that that's necessary as part of the sanctions
Speaker 1: regime and that they've got the political support to do so.
Speaker 1: I don't I don't know whether we should expect the
Speaker 1: wholesale expropriation and redistribution of OI assets, but I do
Speaker 1: think that anybody with a bone of legal realism in
Speaker 1: their body has to think that courts and other legal
Speaker 1: actors are going to be more receptive to this kind
Speaker 1: of thing now than they were five years ago or
Speaker 1: even frankly a month ago. Presumably for the creditors, though
Speaker 1: this sort of more political expropriation as opposed to the
Speaker 1: court avenue is less appealing in the sense that if
Speaker 1: it just sort of goes through sort of political apparatus,
Speaker 1: is those those assets, aren't that's serily going to be liquidate,
Speaker 1: liquidated to the benefit of creditors. Well maybe and maybe
Speaker 1: not so. What we've seen recently with the Iranian Central
Speaker 1: Bank assets and the most recently with the Afghan Central
Speaker 1: Bank assets is that the administration, I think, using executive
Speaker 1: order and then some Congressional Action has said, you know,
Speaker 1: we're we're making these uh wide open, fat and happy
Speaker 1: for a certain subset of claimants to go after. So
Speaker 1: this is this is very different. At the beginning of
Speaker 1: the podcast, you and Tracy were talking about the analogies
Speaker 1: or in memories of the eighteen default on the tsars
Speaker 1: Um debts back then and then subsequently, you know, when
Speaker 1: Germany defaults in the Nazi era and the governments were
Speaker 1: very careful about not doing things to make enable private
Speaker 1: claimants to seize foreign state assets. Today that's completely changed.
Speaker 1: Governments are much more willing to say to private creditors
Speaker 1: they're not behaving, well, gonna make make it possible for
Speaker 1: you to seize that assets. Now. I'm not sure if
Speaker 1: President Biden will use that path today to allow Paul
Speaker 1: Singer and his lawyers to go after these assets. But
Speaker 1: if you look at who's talking in the press today,
Speaker 1: who is salivating at the possibility of seizing assets, and
Speaker 1: you have to read between the lines, I think a
Speaker 1: lot of those actors in the Argentine episode are are
Speaker 1: they've got their guns ready? If I can just add
Speaker 1: one quick point, I think that the so there's two
Speaker 1: things here, at that point in slightly different directions. One is,
Speaker 1: to the extent we're looking at these non traditional ways
Speaker 1: to distribute assets, then financial creditors are going to be
Speaker 1: competing with other claimants and will maybe not be the
Speaker 1: most sympathetic of the group. So it certainly wasn't to
Speaker 1: help financial creditors that off ghun or around in central
Speaker 1: bank assets were um, we're accessed. The other thing I
Speaker 1: just want to point out there was one of the
Speaker 1: reasons why efforts to get at Russian assets failed historically
Speaker 1: in the recent years anyway, is because countries were worried.
Speaker 1: The Russians explicitly threatened, Hey, if you let private creditors
Speaker 1: get at our assets, we're gonna do the same thing
Speaker 1: to your assets here, and of course we'll gin up
Speaker 1: some claims, uh, and you're we're going to expropriate in
Speaker 1: effect your assets here. Query weather. That kind of threat
Speaker 1: which was quite effective at getting UH, courts and legislators
Speaker 1: in Europe to back off their willingness to let creditors
Speaker 1: get at Russian assets. Query Weather. That kind of threat works.
Speaker 1: Now you know you mentioned uh, the sort of types
Speaker 1: that were active in the Argentina situation circling now, and
Speaker 1: I realized we've we've made it about thirty minutes into
Speaker 1: this podcast without actually mentioning Perry Passu. Uh So maybe
Speaker 1: we should talk about that and how it potentially applies
Speaker 1: to the Russia's situation, because I think you've pointed out
Speaker 1: that there is another way that the Russian bonds are
Speaker 1: kind of weird and unique, and that has to do
Speaker 1: with the way the Perry pass you pause was originally
Speaker 1: um structured and then it seems to have been revised.
Speaker 1: So could you maybe walk us through what exactly happened
Speaker 1: there and what Perry pass you is for those who
Speaker 1: don't know. Oh, I'm so glad you asked this question.
Speaker 1: I love pari passu party. It's my favorite part. Pari passu,
Speaker 1: which just means in Latin equal or equal step. Is
Speaker 1: this old obscure clause from over a century ago at least,
Speaker 1: that's basically in every bond contract, And in around two thousand,
Speaker 1: two thousand and one, in an obscure case involving Peru,
Speaker 1: Paul Singers Operation Elliott Associates, they were trying to sue
Speaker 1: Peru for not paying it they had held out from
Speaker 1: debt restructuring and they came up with this incredibly clever
Speaker 1: strategy using the clause that basically everybody who had written
Speaker 1: about it in the literature until then said, you know,
Speaker 1: there's this weird clause, but we don't know why it's there.
Speaker 1: It's kind of old, and so we repeat it. It's
Speaker 1: pretty it has some Latin. We like Latin. And they said, hey,
Speaker 1: it says in equal step. In equal step means you
Speaker 1: can't pay some creditors even though those creditors took you know,
Speaker 1: twenty cents on the dollar, and not pay us. Equal
Speaker 1: means you have to pay us an equal percentage of
Speaker 1: whatever you're paying. And they said, since we didn't restructure
Speaker 1: our debt, you have to. If you're paying them hundred
Speaker 1: percent of their restructure debt, that means twenty cents on
Speaker 1: the dollar, you have to pay us hundred percent of
Speaker 1: our non restructor debt, which is hundred cents on the dollar.
Speaker 1: And they made a killing against Peru. Everybody thought this
Speaker 1: strategy would never work. You know, my co authors and I,
Speaker 1: which include Mark, we did interview us with basically every
Speaker 1: senior sovereign debt lawyer in London and New York, and
Speaker 1: we said aren't you worried about this happening again, this
Speaker 1: crazy strategy, since you guys haven't changed your clauses. And
Speaker 1: they said, no, no court in England or New York
Speaker 1: would ever follow the crazy Brussels strategy. And Elliott Associates
Speaker 1: ran the same strategy again against Argentina, and this time
Speaker 1: instead of winning about a hundred million, the two billion.
Speaker 1: And so now that fast forward to today. Basically every
Speaker 1: international issuer in the sovereign debt market changed their clauses
Speaker 1: in order to preempt this strategy. And they did this
Speaker 1: around two thousand and fourteen, I mean time of CRIMEA
Speaker 1: and Mark and I Mark and correct me. I thought
Speaker 1: this is the end of this story. In fact, many
Speaker 1: articles were written about this is the end of the story.
Speaker 1: Turns out the Russian bonds have the old parti passu clause,
Speaker 1: the old one that Elliott won on. And I mean,
Speaker 1: I can't help but think it's either the Russians were
Speaker 1: so arrogant that they thought they would never get sued,
Speaker 1: or somebody goofed. Now there are other goofs in the
Speaker 1: in the specific party pass clause, and we can't tell
Speaker 1: whether they're intentional or not. But the key point is
Speaker 1: if I were an institution like Elliott and although they've
Speaker 1: become more respectable now, I would read this clause and say, hey,
Speaker 1: I can run this again. I don't know what you
Speaker 1: guys think, but for me, this is so fantastic. Well
Speaker 1: you just on that note. I mean, it does seem
Speaker 1: like there was a change to the peripass you clause
Speaker 1: where they deleted the idea that the peripassy would would
Speaker 1: sort of apply in the future, and it seems like
Speaker 1: they altered the language to suggest that it just applies
Speaker 1: at one point of time. What does that mean exactly?
Speaker 1: Like it seems like the implication would be that the
Speaker 1: government could subordinate some investors at a later date. Okay,
Speaker 1: so you're really getting into the weeds of the subcrivision,
Speaker 1: and I that I'm enjoying sitting back and listening hearing
Speaker 1: Tracy's expertise. Are questions. So normally the Perry Patsu clause
Speaker 1: that nobody understands says the bonds rank and will rank
Speaker 1: equally with all other debt, and let's not talk about
Speaker 1: all of them. So again, rank and will rank. So
Speaker 1: it's a representation at the time the bond is they
Speaker 1: shoot saying they all rank equally now, and then it
Speaker 1: says in the future, we will continue to make sure
Speaker 1: they rank equally. In the Russian clause, it says basically,
Speaker 1: the bonds rank equally. They deleted the words having to
Speaker 1: do with the future the will rank now. I think
Speaker 1: the question for court will be do we read it
Speaker 1: as the bond just saying they ranked equally at the
Speaker 1: time of issue, which makes the whole pari passu clause
Speaker 1: gibberish meaningless because the whole point of the clauses that
Speaker 1: it protects you against future misbehavior by the sovereign. Or
Speaker 1: is the court going to say, oh, that looks like
Speaker 1: a typo. And it also doesn't make sense with they
Speaker 1: have events of default saying it is an event of
Speaker 1: default if the bonds no longer ranked pari passu. So
Speaker 1: I mean there are these giant inconsistencies in the document
Speaker 1: and the court's going to have to decide. And of
Speaker 1: course this goes back to the fact that we have
Speaker 1: no idea which court uh, but a court is going
Speaker 1: to have to decide are these typos or aren't these
Speaker 1: brilliant strategic moves by the Russians to make sure they
Speaker 1: never have liability. My guesses and Elliott associates would be
Speaker 1: able to make a good argument, but again it's not clear. Tracy,
Speaker 1: I mean you you have pointed out a very crucial
Speaker 1: portion of this truly obscure clause, the deletion of some
Speaker 1: two words that that could be valued at a few
Speaker 1: billion dollars. Thinking about going back, I think about the
Speaker 1: Argentina uh Legal Fund and obviously dragged on several years.
Speaker 1: As we've been talking about. Russia is a unique situation
Speaker 1: because it's already just in the last few weeks, become
Speaker 1: so cut off from the world, far more than even
Speaker 1: we would expect to see from a sovereign debt. Is sure,
Speaker 1: how much do some of the consequences and legal questions
Speaker 1: that you're talking about intellect in the last few answers?
Speaker 1: How much do they essentially only become relevant in a
Speaker 1: future world down the down the line, when perhaps under
Speaker 1: a different UH Russian president who knows, but it's hard
Speaker 1: to see them in the existing one. Russia makes an
Speaker 1: attempt to sort of rejoin the financial world in good
Speaker 1: standing because obviously in the current moment, you know, no
Speaker 1: one is going to be buying new Russian dead and
Speaker 1: basically it's cut off from financially, but there could be
Speaker 1: a point point ten years from now or five years
Speaker 1: from now where a different Russian government wants to become
Speaker 1: part of the global market. Again, how much do these
Speaker 1: questions essentially become relevant? Is well, the they're going to
Speaker 1: have to resolve these legal fights by then in order
Speaker 1: to rejoin the financial system. I mean, I think this
Speaker 1: is not just a great question, it's the question that
Speaker 1: determines whether going to court and playing the litigation game
Speaker 1: is worthwhile. The Argentina example is a great one because
Speaker 1: it was not just a few years, it was fifteen years.
Speaker 1: The first big chunk of that was spent chasing Argentina's
Speaker 1: assets around the world and coming up mostly empty handed.
Speaker 1: And then everything came to a head with this pari
Speaker 1: passue litigation that me too was talking about. But the
Speaker 1: reason it all worked, the reason it produced a big
Speaker 1: payout at the end of the day, is because there
Speaker 1: was a change in government and because Argentina wanted to
Speaker 1: normalize its financial and commercial relationships with the rest of
Speaker 1: the world. So I guess the question is this, do you,
Speaker 1: if I'm an investor, do I think Russia is going
Speaker 1: to want to normalize those relationships, or do I expect
Speaker 1: to be looking at Fortress Russia for the next fifteen
Speaker 1: or twenty years, Because if it's the latter, I can
Speaker 1: have all the enforcement rights in the world that I
Speaker 1: could have the best written contract that gives me the
Speaker 1: most potent set of enforcement rights in the world. But
Speaker 1: unless I get lucky, I'm not going to get paid.
Speaker 1: And one thing's for sure, most investors will not get paid.
Speaker 1: The only way you get paid is when the country
Speaker 1: wants to normalize its relations Can we maybe talk a
Speaker 1: little bit about Ukrainian debt and what we might expect
Speaker 1: to see there as well, because a lot of the
Speaker 1: focus has naturally been on Russia. It has a lot
Speaker 1: of issuance. It seems like there's a very big question
Speaker 1: mark over whether or not it's going to be able
Speaker 1: to pay out on what it owes. But Ukraine has
Speaker 1: issued in the market as well, and also is presumably
Speaker 1: financially and perhaps operationally strange strained given uh it's fighting
Speaker 1: against Russia at the moment, So what happens there? In
Speaker 1: some ways this is the bigger and more interesting question
Speaker 1: to me Ukraine has, if I'm not mistaken, almost aboul.
Speaker 1: The amount of sovereign debt that Russia has somewhere in
Speaker 1: the range of nine plus billion dollars worth of debt,
Speaker 1: and they were already in trouble before the invasion. Right now,
Speaker 1: I mean now that that they have, by estimates hundred
Speaker 1: billion dollars plus in damage to their country, and they're
Speaker 1: desperately spending their money and defending themselves. It seems for
Speaker 1: sure that they are going to go into default. But
Speaker 1: there are another couple of complicated questions here. Complicated because
Speaker 1: the relevant law goes back again to two hundred years ago.
Speaker 1: One of which is, at some point Russia has taken
Speaker 1: over in its invasion so much of Ukraine that the
Speaker 1: debt becomes Russian debt, and at that point investors are
Speaker 1: going to have to sue Russia for the debt. And
Speaker 1: one other complications in this is what happens to the
Speaker 1: debt that Ukraine is desperately trying to raise right now
Speaker 1: in order to fight the Russians. Does does Russia have
Speaker 1: to pay that debt as well after it takes over
Speaker 1: the Ukraine. It's not clear. The old international law actually
Speaker 1: said that Russia might not have to pay that debt.
Speaker 1: That strikething as completely antiquated and wrong, But that is
Speaker 1: what the old law would have said. Ukraine obviously needs
Speaker 1: money to fight to defend itself right now, and suppose,
Speaker 1: you know, the war comes to an end in Ukraine,
Speaker 1: sovereignty is intact. Is that debt treated just like any
Speaker 1: other debt that would be issued in normal times? Are
Speaker 1: the opportunities for forgiveness of that debt? Are there other
Speaker 1: ways that it can raise money beyond debt markets such
Speaker 1: that it doesn't impose the future financial burden? Is that
Speaker 1: what is the optimal way to fund its defense efforts
Speaker 1: internationally without creating this huge future burden? So me too
Speaker 1: may have more developed thoughts on this than I do.
Speaker 1: My initial reaction, first of all, is that this is
Speaker 1: a relatively happy set of circumstances, and so I only
Speaker 1: hope that this is the problem we're dealing with down
Speaker 1: the road, going to commercial creditors and asking them for
Speaker 1: concessional treatment to get you back on your feet after
Speaker 1: something like this, You know, surely there's going to be
Speaker 1: a restructuring. There would need to be a restructuring, and
Speaker 1: I would imagine that commercial creditors might be a little
Speaker 1: bit more willing to participate than in the normal case.
Speaker 1: But you know, I don't see any way that you
Speaker 1: even begin to restructure the debt that Ukraine has much
Speaker 1: less begin the process of rebuilding without massive concessional and
Speaker 1: official finance. And surely the private sector has a role
Speaker 1: in that. But but I I think it's a relatively
Speaker 1: small one. Me too. Maybe you have a different view. No,
Speaker 1: I mean there are two questions, and Joe, I hope
Speaker 1: I'm not misunderstanding you. I think the two questions are one,
Speaker 1: what happens now if the bond markets, the private bond
Speaker 1: markets are reluctant to fund Ukraine? And then the other
Speaker 1: question is what happens after all of this blows over,
Speaker 1: assuming Russia doesn't take over all of Ukraine? What happens
Speaker 1: to Ukraine? There? I think? And maybe I'm just echoing
Speaker 1: what Markus saying. I think in both cases, the official sector,
Speaker 1: meaning mostly Western Europe and the United States, needs to
Speaker 1: step in and provide the support a provide support out
Speaker 1: because the private markets are going to be reluctant to
Speaker 1: support Ukraine and be promised to support them after the
Speaker 1: fact in the restructuring that is surely not their fault. Yes,
Speaker 1: they're precarious, but they were they're precarious because of the
Speaker 1: invasion of of Crimea, and after that invasion, the official
Speaker 1: sector didn't really say this is not your fault, we're
Speaker 1: gonna help you in a big way. They made Ukraine
Speaker 1: deal with the private creditors and Ukraine actually got pretty
Speaker 1: harsh treatment in that restructuring after the two thousand fourteen invasion.
Speaker 1: I think this time we need, we need the rest
Speaker 1: of the world needs to do a lot better of
Speaker 1: visa b Ukraine. But those decisions have not been made.
Speaker 1: I mean that this is this has just all been
Speaker 1: left up in the air, as if nobody's really thinking ahead.
Speaker 1: Met too. I think that's a good place to leave
Speaker 1: an Obviously, there are so many questions around this entire situation.
Speaker 1: It's going to be absolutely fascinating to see how it
Speaker 1: all plays out. So thank you to you and Mark
Speaker 1: as well for coming back on the show. Thanks, thank you,
Speaker 1: thanks for having us well, Joe. I found that conversation
Speaker 1: absolutely fascinating and clearly there are a lot of threads
Speaker 1: to follow. But you know, one kind of crazy thing
Speaker 1: to think about is that I mentioned that nineteen eighteen
Speaker 1: debt when we started. I mean, some people are still
Speaker 1: holding certificates, you know, stored in their addicts you can
Speaker 1: buy them off eBay and things like that, and still
Speaker 1: waiting for a payout and thinking it's going to happen.
Speaker 1: And so it's kind of weird to think that maybe
Speaker 1: we're in a similar situation now where people are going
Speaker 1: to be holding onto Russian bonds and waiting for a
Speaker 1: payout a hundred years from now. Eb the real OTC,
Speaker 1: the original or maybe the original electronic bond marketplace. But no,
Speaker 1: in all seriousness, like that's sort of a century is
Speaker 1: a very long time. But it does seem like in
Speaker 1: many cases for the investors that you know, are looking
Speaker 1: for a big pay day, the bet is years and
Speaker 1: years down the road, because it really does seem, uh,
Speaker 1: there's very little prospect of some sort of I think,
Speaker 1: I mean, I think a lot of people think that
Speaker 1: that as long as the current government is in place
Speaker 1: in Russia that there's going to be some big reproach, approach,
Speaker 1: a mint and reintegration. I mean, there may be some
Speaker 1: dropping of the sanctions after the war, hopefully hopefully positive outcome,
Speaker 1: but it is hard to imagine a complete rollback, right
Speaker 1: and going back to the early status quo, and as such,
Speaker 1: it may be that some of the big big pad
Speaker 1: could be fifteen twenty years, who knows how long, how
Speaker 1: far into the future totally. But the other thing that
Speaker 1: this all reminded me of, and I think I've touched
Speaker 1: on this in various works before, but this idea that bonds,
Speaker 1: ultimately they have so many, so much morality and values
Speaker 1: sort of embedded in them, and they all have a story, right,
Speaker 1: like these bonds were issued because of this, and it
Speaker 1: means I owe money to this person because of that.
Speaker 1: And when the story starts to shift and when the
Speaker 1: values we attached to that debt start to shift, which
Speaker 1: is arguably what we're seeing with Russia now. You know,
Speaker 1: three weeks ago, Russia was investment grade and it was
Speaker 1: considered obviously not a pristine player on the international stage,
Speaker 1: but acceptable for people to do business with. And that
Speaker 1: has just completely changed in less than a month. I
Speaker 1: think that's a that's a really good point, and the
Speaker 1: idea of the sort of our once a new story
Speaker 1: is attached, then perhaps the law follows. And so a
Speaker 1: good example that could be sort of this question of
Speaker 1: all right, our oligarch assets held abroad, can they be
Speaker 1: seized and liquidated for the benefit of creditors? And maybe
Speaker 1: that has been very legally difficult to do in the past.
Speaker 1: But already, as our guests discussed, in the last few weeks,
Speaker 1: we've seen a rethinking of certain Western government to the
Speaker 1: idea of seizing and liquidating oligarch assets. And as such,
Speaker 1: maybe what seemed to be an impossible veil to appears
Speaker 1: previously may suddenly be possible. It just changes the environment.
Speaker 1: This is exactly it. And not just liquidated to satisfy creditors,
Speaker 1: but could they for instance, Mark sort of hinted at this,
Speaker 1: could they be liquidated to fund some sort of you know,
Speaker 1: war aid or compensation for people in Ukraine? And then
Speaker 1: and then again right, and the fascinating question of whether
Speaker 1: Russia itself may be a creditor for debt being currently
Speaker 1: incurred by Ukraine's government is a fascinating question. The other
Speaker 1: thing that I found really striking is this idea that
Speaker 1: again after the annexation of Crimea, Russia seemed to pay
Speaker 1: no penalty. In fact that even that it's stipulated in
Speaker 1: it put in this new language about possible sanctions, and
Speaker 1: yet it was still considered the bonds were trading strongly.
Speaker 1: This idea that after this incident that almost nothing fundamentally
Speaker 1: changed is incredibly striking and almost maybe shameful. Sever Yeah, um, well,
Speaker 1: I feel like we could talk about this for another
Speaker 1: four hours, but shall we leave it there? Let's leave
Speaker 1: it there, all right? This has been another episode of
Speaker 1: the All Thoughts podcast. I'm Tracy Alloway. You can follow
Speaker 1: me on Twitter at Tracy Alloway and I'm Joey Isn't All.
Speaker 1: You can follow me on Twitter at the Stalwart. Big
Speaker 1: thanks to our producers Magnus Hendrickson and Colm Tipton. Followed
Speaker 1: the Bloomberg head of podcast, Francisca Levi at Francesca Today
Speaker 1: and check out all of our podcasts and Bloomberg under
Speaker 1: the handle and podcasts. Thanks for listening,