Welcome to the ninth Pari Passu newsletter,

Thank you for being a subscriber.

Today, we will learn more about:

1. Russian Bonds

2. SVB Summary

What is going on with Russian Bonds?

A lot of interest is spreading around Russian bonds since the invasion of Ukraine. Let’s start by taking a high-level overview of the debt situation in Russia. The country (companies and government) has around 150B in foreign currency debt. Within government bonds, there are different types of debt. What is drawing attention is that certain bonds have an “Alternative payment currency” clause.

These clauses are very rare, and it is essential to understand them. “Alternative payment currency” in the US dollar issuance is defined as “Euros, Pound sterling or Swiss francs or, if for reasons beyond its control, the Russian Federation is unable to make payments of principal or interest (in whole or in part) in respect of the Bonds in any of these currencies, Russian roubles.”

Beyond Control - Basically, these clauses allow Russia, in case of reasons beyond control of the Russian Federation, to pay principal or interest in a different currency from the currency used to denominate the bond. What's unclear is what makes a reason “beyond the control” of the Russian Federation in case it finds itself "unable to pay" in the specified currency. Presumably the fact that Vladimir Putin has forbidden something does not make it beyond the control of the government; he can choose not to forbid it. But could Russia plausibly argue that it is unable to pay because of western sanctions, and these are beyond its control?

Waiver of Immunity - The peculiarity of these bonds does not end at the payment clause. The Russian bond also does not include a waiver of immunity or a clause submitting to the jurisdiction of foreign courts. These absences are incredibly rare in international sovereign bonds. This means that it is not determined who decides the currency. Usually, when a similar question arises, you would go to the jurisdiction clause in the bond to see where the sovereignty has waived his immunity. The clauses explicitly say “we have not submitted to jurisdiction everywhere and we have not waived sovereignty immunity.”

Subscribe to Pari Passu Premium to read the rest.