Russian Default On National Debt​

By Jake Rickman​

What do you need to know this week?

Many market analysts predict Russia will default on its sovereign bonds. This is because, as of today, Russia is supposed to make an interest payment of $117m on bonds worth $38.5bn.

Given the substantial devaluation of the Russian rouble, which is largely a result of the series of severe sanctions passed against the Russian economy, analysts predict it will not able to make the interest payment.

What happens next? The answer is not so clear.

Why is this important for your interviews?

Sovereign debt is an important part of international debt capital markets (DCM).
Sovereign debt refers to an IOU “issued” (that is, a sum of money borrowed) by the national bank of a country. In other words, sovereign debt is where a government promises to give investors back a sum of money later (usually including interest) in exchange for money upfront.

Governments borrow money for two reasons: first, you cannot sell equity (i.e., ownership) in a government. Second, it is an effective way for the government to raise money for various national causes. For instance, a government might want to fund a big infrastructure project and it can issue sovereign debt to do so (the other main option being taxation).

From the perspective of the creditors (those that loan money to the nation), governments are usually good debtors: they almost always pay you back. If they do not pay you back, it is likely because the national economy itself is close to collapsing. Put another way, you would tend to only lend money to a country whose economy you suspect is sufficiently strong to pay you back.

Given the actions of the Russian government and the sanctions imposed against it, the economy has been crippled. This prevents it from “servicing” (i.e., paying back) any interest it owes on the debt, which means it will default.

What makes sovereign borrowers complicated is that it is less straightforward to recover your money. For corporate or individual borrowers, you can grant security over an asset (a house, a car) and if the borrower does not repay you, you can legally take ownership of the asset and sell it. That is obviously much harder to do for government-owned assets (though not unheard of).

Given that the Russian government is essentially isolated from much of the global economy, those that have lent it money may therefore find themselves in a difficult position.

How is this topic relevant to law firms?

When it comes to borrowing money, law firms act for sellers, buyers, and the third parties involved (mainly banks).

For most large transactions, this involves private sellers and buyers; but it is no different when a country borrows money. As a notable example, Cleary Gottlieb continues to act for Argentina on its sovereign default.

However, given the mass exodus of law firms from Russia, it remains to be seen if any well-known international law firm will represent Russia on its likely default.