Expert’s Opinion: The Sanctions Season Serial, and What If? – Paul Goncharoff

Among woke movers and shakers of the worldbeating ‘sanctions set’ spring has truly arrived! Hormones get overactive prompting some to get on the streets to raise property damage insurance premiums or to diplomatically ‘grow a pair’ through still more sanctions against foreign peoples, especially if they want to raise money in the sovereign debt markets. 

The “plat du jour” these past few days making its dyspeptic way from Washington and London seem to be mulling yet again the possibilities of Sovereign debt sanctions emerging against Russia.

Russia, after all, should probably be chastised as its reserves have exceeded its external debts since 2019, a polar opposite to both the EU and the US. Fiscal conservatism and common sense jars the new QE normal, and should be soundly sanctioned and thrashed out of Russia’s mind before it spreads further.

The other day I was having a social meeting with some financial operators here in Moscow, and one question wrestled with was “what might be the unintended consequences if the US and EU decide to unpleasantly sanction Russian sovereign debt?”.

Well, one thing is that Russia hasn’t issued any new foreign currency bonds in 2014 or 2015, only starting again in mid-2016. The other is that the wording in Russia’s new bond issuance documents has changed a smidge, and is worth noting. The new wording introduces a reference to an ‘[alternative] payment currency event’ wherein Moscow can re-pay debt holders in USD, Euros, or Swiss Francs when interest payments or the principal came due if for uncontrollable reasons payment cannot be executed in US Dollars. Lots of food for lawyers in this, but the bottom line is that an alternative to the USD channel opens while the specifics of which are still vague.

There is even a newish so far Eurobond-only version that states “if for reasons beyond its control the Russian Federation is unable to make payments of principal or interest (in whole or in part) in respect of the New Bonds in any of those currencies”, it can settle “in Russian rubles” at the exchange rate against the US Dollar set by the Russian Central Bank at that time. That should give pause to holders of Russian sovereign Eurobonds if such new sanctions are imposed.

Other possibilities mentioned several times in discussion were the potential and growing use cases for digitally linked currencies and not only CBDC’s which are in development notably by China and Russia. Truly, what if the new normal wording might evolve to ‘Moscow can re-pay debt holders in USD, Euros, ETH, BTC or Swiss Francs when interest payments….’. Food for thought.

The very fact that in a meeting of sober-minded financial professionals we discussed Cryptocurrencies and digital currencies was notable. Then to progress on to use as vehicles to allow the free and open trade of goods and services concerning sovereign governments is a development that has taken root and can only expect to grow closer. In the meantime, we all have to wait for the new sanctions season serial starring unintended consequences to color our lives.

Analyst Paul Goncharoff, Moscow  

Ru-Main, 29.03.2021 

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