Russia Enters Selective Default​

By Jake Rickman​

What do you need to know this week?

In what could be read as defying the West, Russia attempted to make a $650m dollar-denominated sovereign bond payment in rubles instead of dollars. As a result, S&P, the global credit rating agency, declared that Russia has entered a “selective default” on some of its outstanding sovereign debt, which refers to when a debtor (i.e., Russia) chooses not to make payments on one set of debt while meeting other debt obligations.

There is no consensus as to what exactly this means for Russia or its noteholders (investors that hold Russia’s bonds). The last time Russia defaulted on its foreign debt was over 100 years ago following the 1917 Russian Revolution.

Some of the predictions as to what happens next have become rather academic: the bonds are governed by English law but there is a provision exempting Russia from recognising any foreign jurisdiction. Noteholders are likewise unlikely to submit to a Russian court, especially considering one of Russia’s arguments is that the West has forced Russia into default.

In short, this is an unprecedented situation.

Why is this important for your interviews?

The sovereign debt market is an important part of the global economy: issuing sovereign debt is one of two main ways nations can borrow money (the other being through taxation); for investors, different countries’ bonds provide different levels of return and risk.

That said, the sovereign debt market gets less attention than other markets, which means if you can demonstrate a fundamental understanding of how it operates and why this is significant, you are likely to impress interviewers.

All debt instruments are contracts between the borrower and lender, including sovereign bonds.

Bonds in general are special kinds of debt instruments where the debtor issues certificates to a diverse set of investors in exchange for a large sum of money upfront. This certificate acts as an IOU, entitling the certificate holder (noteholder) the right to receive regular interest payments, as well as a final payment at the end which “redeems” the principal amount (called the “maturity”).

Meanwhile, until the maturity date arrives, the noteholders are free to trade their notes on a “secondary exchange”. The fact that there is a regulated secondary market makes bonds more “liquid” than bank loans, which is why investors treat bonds and loans as different asset classes.

Sovereign bonds are usually issued using the same set of legal documents as corporate bonds, though investors tend to have less contractual protections compared to corporate bonds. Notably, sovereign issuers tend to assume far fewer obligations (called “covenants” and “representations”), such as the requirement to maintain a certain level of “liquidity” (i.e., cash on hand).

They also have fewer “events of default” — in many cases, only non-payment will trigger an “EoD”.

How is this topic relevant to law firms?

Cleary Gottlieb is known for representing Argentina during its ongoing sovereign debt default. They have represented the country at various high-stakes “creditors committee” negotiations throughout the years, which typically involves the sovereign debtor’s lawyers working with the noteholders to create a new debt package that works in favour of both parties.