If Putin has money for you, good luck getting it

The stake involved about $40 billion in Russia’s sovereign debt is denominated in dollars and euros. Foreign investors also hold $28 billion of Russian debt in rubles.

Until a few weeks ago, lending to Russia seemed like easy money. In 2019, Russian bonds traded like those of Goldman Sachs. Given Russia’s enviable financial position, huge revenues from oil and gas sales to Europe, and over $630 billion in hard currency and gold reserves, money managers can be forgiven. for betting on Russia in the long run. Well, not that fast. Anyone who bothers to read the bold text of the offering memos should have a second thought.

Sovereign emerging-market borrowers often offer to waive their sovereign immunity by invoking the US Foreign Sovereign Waivers Act and the UK National Immunities Act. In addition, most borrowers agree that in the event of a default, creditors can sue in New York or the UK. And while the bonds are governed by British law, Russia explicitly refuses to submit to the jurisdiction of any court, foreign or domestic.

Either way, judges can assert jurisdiction, but because litigation is so expensive, creditors of a defaulted Russia have little prospect of going to a competent court with a claim. The demand is ripe for resolution. Those pursuing the Russian loan will face years of hellish litigation, millions of dollars in legal costs, and possibly loss in the end.

That was just the beginning of the pain. For nearly $15 billion of its bonds, Russia has contractual rights to make payments in rubles instead of dollars or euros. There are certainly struggles over the calculation date and how many rubles for the dollar. Creditors do not know what a ruble will be worth by the time they receive payment.

Let’s say the creditors clear all those hurdles and get the final judgment from the foreign courts. It is highly likely that Russia will refuse to pay. A decision not to respect the judgments would set off a new stage of litigation: search for assets such as ships, planes, satellites, real estate and bank accounts and ask a foreign court to authorize the collection. hold assets for payment.

Then a frenzy of competition lawsuits will begin. More creditors will have claims — like the former owner of Russian oil company Yukos, who is currently nursing arbitration awards totaling more than $50 billion. And it is safe to say that the hundreds of billions of dollars that the Ukrainian government and citizens are claiming for the death and destruction caused by Russia will reduce the claims of other creditors.

Enforcement of claims based on Russia’s sovereign debt will be difficult, but a series of sovereign defaults in emerging markets are long overdue. Most bond contracts have been weakened over the past 20 years by increasingly baroque and manipulative and nearly unenforceable collection provisions. Meanwhile, Western governments and international organizations remain hostile to enforcement actions. The U.S. Treasury Department often submits your briefs to the court to assist repeat offenders, and the International Monetary Fund often requires private lenders to accept reduced payments. The courts will soon need to decide which claims take precedence — claims arising from trade, financial transactions, or indemnification.

Russia will soon demonstrate what happens when a poorly written contract makes payment optional. There are good reasons to compensate foreign lenders, but relying solely on the goodwill of a sovereign state is treason. The time has passed for those who invest in emerging market bonds to understand what they own.

Like any business agreement, the structure of the contract terms is important. Words are important, but judgment is even more important.

Mr. Newman is a former hedge fund manager specializing in sovereign debt and the author of “Undermoney: A Novel.”