Invest: Invest in Russia?

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If you are an American or European investment firm, and you bought dollar-denominated Russian government bonds, do you have a preference between these scenarios?

  1. Russia decides not to pay you back in dollars, and doesn’t. You complain, and sue, but Russia is a big country with nuclear weapons so your complaining doesn’t accomplish much.
  2. Russia really wants to pay you back, and has the money, but it chooses to launch a brutal unprovoked invasion of another country, which causes the U.S. and much of the rest of the world to impose harsh sanctions including blocking dollar payments on its bonds, with the result that Russia can’t pay you back your dollars. Russia complains, and sues, but the U.S. is also a big country with nuclear weapons (and control over the dollar payments system) so its complaining doesn’t accomplish much.
Russia warns that it will see any missile launched at its territory as a  nuclear attack - The Economic Times

You might, right? Like in Scenario 2, if Russia really does want to pay you, it might find a way around the sanctions; a Russian finance ministry official might meet you in a park with a bag of gold and say “now we’re even.” That’s better than getting nothing in Scenario 1. Also Scenario 2 might seem a bit more temporary; maybe the war will end and you’ll get paid in full. 

Still I suspect that the practical differences between these scenarios are not that big. In particular, once either of these scenarios occurs and you don’t get paid, will you want to lend more money to Russia in the future? “They might decide not to pay me back” is a credit risk, and “they might launch a war of aggression and be unable to pay me back” is a credit risk, and they are not so different in their effects. “No this is not the bad Scenario 1, but the good Scenario 2,” Russia can say, but I don’t think Scenario 2 is really that good?

But people are very invested in the metaphysics of this:

Russia will halt bond sales for the rest of the year and take legal action if sanctions force it into a default on its debt, according to the country’s finance minister.

Anton Siluanov’s comments in Russian newspaper Izvestia come days after the government breached the terms on two bonds by paying investors rubles instead of dollars, and its credit grade at S&P Global Ratings was cut to ‘selective default.’

The threat of default has been hanging over Russia for weeks after it was hit with sanctions because of its invasion of Ukraine. The government in Moscow says it has the funds to meet its debt obligations and has repeatedly blamed the restrictions for its difficulties in making bond payments. Siluanov has said the U.S. and others are trying to force Russia into default. 

“Of course, we will sue, because we have taken all the necessary steps to ensure that investors receive their payments,” he said, according to Izvestia. “It will not be an easy process. We will have to very actively prove our case, despite all the difficulties.”

Who will they sue? Where? For what? Russia wants to vindicate the metaphysical status of its default as not-really-a-default, but there is not really a good court for vindicating metaphysical status.

Meanwhile, one problem with doing a fire-sale divestiture of your Russian operations is that you are selling those operations at fire-sale prices to Russian operators:

Societe Generale SA agreed to sell its Rosbank PJSC unit to the investment firm of Russia’s richest man, taking a hit of about 3 billion euros ($3.3 billion) to exit the heavily sanctioned nation.

The Paris-based bank signed an accord to sell its entire stake in Rosbank and its Russian insurance subsidiaries to Vladimir Potanin’s Interros Capital, according to a statement on Monday. …

Potanin, 61, is the world’s 43rd richest person with a net worth of $29.6 billion, according to the Bloomberg Billionaires Index. He is president of MMC Norilsk Nickel PJSC, which accounts for about 40% of global palladium output and 10% of refined nickel, and has a stake in Russian company Petrovax Pharm.

Potanin had avoided sanctions by Western governments until Canada recently added him to its list. 

One reason to divest from Russia is something like “Russia is uninvestable and these assets are worthless, so selling them at any price is great.” In which case, sure. The other reason is something like “investing in Russia raises moral and public-relations problems, so we are getting out even though the assets are financially valuable.” In which case, the people who don’t care about the moral and public-relations problems are getting a sweet deal.