Sanctions in War (1)

Author's Diary

Intermittent jottings, and occasional thoughts on investment openings.

This thread: Sanctions in War

Diary Post Dated Monday, 21 March 2022

So, the Russian State did not, after all, default on its $117 million dollar bond payment last Friday, a default widely predicted in media outlets publishing in English. In the end, not much was made of this “surprising” outcome. The Financial Times, in fairness, did carry a report on the 18th, setting out the facts. These include the clarification that,

“US sanctions restrict investors from trading Russian bonds issued after March 1, but they are still allowed to trade any that were sold before that date” (such sum estimated to be worth in the order of $38.5 bn) (given events since 24 February, highly unlikely that there would be much demand for Russian government bonds issued after March 1 anyway!)

The FT’s market note is revealing: “The two bonds (on which the interest payment had been due), traded at about 50 cents on the dollar on Friday - up from roughly 20 cents a week ago”. (Both quotes from FT digital edition, 18 March 2022, Russian bond interest payments flow through western financial system, by Tommy Stubbington and Philip Stafford)

For further depth, I was able to turn to Adam Tooze, whose Chartbook # 101 - Odious Claims, 18 March 2022, was devoted to the subject. As I understand it, from what Professor Tooze writes, JP Morgan (acting as Russia’s corresponding bank, which I think means it is the bank which holds the foreign currency of the Russian central bank) processed the interest payments, and transferred the money to Citigroup, the bank responsible for distributing the money to investors. Washington authorised this “The US Treasury signed off on the payments as not violating sanctions”. “A Tooze, chartbook # 101)

Professor Tooze then introduces his evaluation of this transaction with the question “If you invest in Russian government debt what are you hoping to profit from? … you are investing in Putin’s regime, warts and all.” His extended analysis of such an investment decision involves a legal argument (which I will leave you to read for yourself), and concludes:

“But those who have invested directly in Putin’s regime, the foreign bond holders, may by way of Western courts, have (speedy and preferential) recourse against Russian public assets. … If this (AT’s interpretation of international law) is broadly speaking correct, it is surely an intolerably perverse situation. Should the fact that the $117 million in interest (that) are currently flowing to Western investors be a cause for celebration or scandal?”

I compose this diary note, and related ones that will follow, on the grounds that one of the most examined and evaluated subjects flowing from present events will undoubtedly concern the effectiveness and modality of using international finance as a weapon of war - either for deterrent effect or as weaponised aggression.

For now, I conclude, that capital has a way of looking after its own.