Judging by the bond market, it will take years for Russia to re-enter the global financial system.
Russian government bonds fell below 10 cents on the dollar last week, putting the country’s debt on par with Venezuela, which collapsed into famine five years ago. The valuation is near the low-water mark on bonds set by serial defaulter Argentina, which took 15 years to repay creditors after a bitter legal battle with hedge funds.
The country faces a key interest payment on dollar-denominated bonds Wednesday, and Russia’s Finance Ministry has sent investors conflicting messages about whether it intends to give them dollars or rubles. The uncertainty sparked concerns that a payment in rubles could result in a default and speculation about what legal remedies creditors might pursue.
Fund managers are also debating how long it would take creditors to recover their money and are concerned about the reputational taint that hangs over all Russian assets, from stocks and bonds to oil and beer.
Russian bonds had investment-grade ratings and traded around 100 cents on the dollar until the country invaded Ukraine, triggering unprecedented financial sanctions by the U.S. and European countries. The Kremlin responded with measures including a block on bond payments in foreign currencies such as dollars and euros that stoked expectations of a default.
Distressed-debt investors, sometimes called vulture funds, typically flock to government bonds trading at such low prices. They aim to negotiate payouts when countries seek to reaccess international bond markets or to force them to pay up through litigation. Hedge funds are reluctant to run that playbook with Russia.
Bondholders would struggle to seize Russia’s overseas assets through lawsuits, said Jay Newman, the former Elliott Management Corp. portfolio manager who led international litigation against Argentina that made the hedge fund $2.4 billion in 2016.