Recent sanctions that stop US bondholders from buying Russian bonds in the secondary market and stop holders from being paid what the borrower owes them may well hurt Vladimir Putin’s pride, but they hurt US bondholders and the global CDS market more.
US lawmakers have doubled down on Russian sanctions in the bond market in recent weeks. Not only have they allowed a carve-out to expire that allowed Russia to continue servicing its debts to its bondholders, but they have banned secondary trading in the country's bonds, not just new issues.
The argument that this is being done to make Russia an international pariah in the bond markets and thus increase its financing costs in the future is dubious. It is difficult to see how those recent sanctions add much to that score given that there is already a prohibition on buying new debt from the country, and that Russia has done quite enough by itself to become uninvestable to any fund that wants to show it cares about ESG. Does it really matter if US bondholders get the money they are owed?
It seems the reason for the move is largely to publicly embarrass Russia further in the bond markets. US officials seem to want a set of headlines about the low value of Russian bonds and in the near future and for it to suffer the embarrassment of a default.
But at what cost those headlines? Quite a lot to western bondholders and the CDS market. Not so much to Russia.
Western bondholders now find themselves sitting on paper that they can only hold or sell to non-US persons. Their prices have sunk further. So when holders do sell, they are in many cases selling at 10¢ an asset they bought at par or even higher. And the only people they can sell to are friends of Russia’s who have no concerns about trading with it.
Issuers generally can buy back up to 10% of their bonds in the secondary market without disclosing it. Investors say it would be surprising if many Russian issuers had not already bought a chunk of their own bonds back at big discounts, based on current trading levels.
As the likes of Turkey or Azerbaijan buy up the rest, perhaps there will eventually be some sort of public offer for the outstanding amount. Rumour has it there is apparently already a roaring trade in Russians buying western products such as i-Pads via their neighbours — why not bonds?
And as a side show, the sanctions have created a problem in the CDS market. The trigger for a Russian sovereign CDS pay-out was pulled a fortnight ago, but how do you settle those contracts without accounts being able to participate in a CDS auction or take delivery of Russian bonds? No one seems to have answers yet, and without those answers the ramifications for the wider CDS market are huge. How do you price CDS in future for any country when fair settlement could be a problem?
Some argue that investors in Russian assets have this year only been served what they deserved after months of warning from the US that Russia would invade Ukraine and there would be sanctions retaliations. But this week, US president Joe Biden said that even Ukrainian leader Volodymyr Zelenskiy tuned out warnings that Russia would invade his country in the lead up to the February 24 attack. If that is the case, was a bondholder really expected to heed those warnings when even Zelenskiy was not?
As Russia continues to haul in gas money the recent bond market sanctions may be the only, or perhaps just the simplest, way of getting the headlines the US wants that it is being tough on the invader.
But in taking the measure of burning its own bondholders to get to Russia, it has done its own stakeholders harm in doing so.