Creditors with Russian foreign currency-denominated government bonds faced an unusual situation. The U.S. said Russia fell into default (debt default) because it did not pay off its dollar debt, but Russia countered that it has money to pay back and is willing to pay back. Russia emphasizes that the U.S. and other Western countries have imposed financial sanctions on Russia, which invaded Ukraine, failing to repay dollar debts.
In addition, the situation is even more complicated as the terms of the contract for the default bonds are unique and Russia shows no signs of ending the war in Ukraine. Reuters looked at the scenario that creditors with $40 billion in outstanding government bonds issued by Russia in foreign currency could take in the future on the 27th (local time).
◇ Acceleration clause
If the debtor violates the contract, an acceleration clause may be invoked that requires the creditor to repay the principal and interest in full. However, conditions must be met for the acceleration clause to be invoked. Looking at the terms of the contract for the default maturity of 2026 and 2036 government bonds, at least 25% bondholders must declare default and accelerate repayment.
However, creditors, which account for 50% of the principal of outstanding bonds, can vote to give up the event of default. Loss of due profit means that creditors demand that funds lent to debtors be recovered before maturity.
The proportion of foreign and domestic investors among creditors holding two default government bonds is unclear, Reuters said.
It is not easy to file a lawsuit against the Russian state. This is because the terms of the contract are unusual and unclear. In particular, the provisions of bonds issued since 2014 when Russia forcibly annexed Crimea, which was Ukrainian territory, are all the more so.
Russia, for example, follows English law on the default bonds, but has not clearly determined the area under its jurisdiction. Creditors may want to proceed with the dispute in London or New York, but Russia may also be allowed to proceed with Moscow, said Mittu Gulati, a law professor at the University of Virginia.
According to Tatiana Olova, chief economist at Oxford Economics, creditors are unlikely to file a lawsuit against the Russian government immediately because the bond has a contractual deadline of three years.