When Russia began its war in Ukraine, the war reacted in ways they have never done before, but Russia was expecting a short war and shrugged their shoulders. The western governments froze assets from the Russian Central Bank outside of Russia and it amounts to $640 billion. The war has gone on for 2 months and normal financial events inside and outside Russia go on. One of the normal events was Russia similar to many countries around the world issued bonds that pay interest and principal. The financial community struggled to define what the terms of the frozen assets meant and how Russia was expected to pay interest on bonds.

In an article by Alan Rappeport of the New York Times News Service, the US Treasury Department came up with a formula of Russia’s $650 million of dollar denominated debt due April 4. The Treasury gave Russia a 30 day grace period that expired May 4. After May 25, US bondholders will longer be able to accept Russia debt payments.

Technically Russia has the assets to pay, they are frozen for the moment, but if the war is still going on what happens to Russia? If there is a default, it would raise Russia’s cost to borrowing for years to come and effectively lock it out of international capital markets. There are a host of funds which invest in bonds which would not be allowed to buy Russian bonds. The bonds would be lowered rated and carry higher interest rates. There would be funds and individuals which could buy the bonds but it is enough?

The issue with Russia is who decides that Russia is in default? Would it be the rating agencies? (Moody’s or S&P Global) Would it be the Credit Derivatives Determination Committee? (The CDDC is a panel of investors in the market for default insurance or credit default swaps. )

For Timothy Ash, a senior sovereign strategist at Blue Bay Asset Management LLP, if Russia does not pay on time, does not pay in the currency in the contract, that is a default – it is crystal clear. For all intents and purposes, Russia is already in default.

The US Treasury department which deals with the sanctions is called Office of Foreign Assets Control or OFAC, would a US court rule against the OFAC if sued?

Tim Samples a professor at University of Georgia’s Terry College of Business and an expert on sovereign debt noted Russia’s total foreign public debt is $75 billion, while Russia’s oil and gas annual sales are $200 billion. He expects Russia to go with alternative facts about defaults. They could point to arcane language in bond contracts that could allow for payments in another currency. Perhaps the economic consequences outside the symbolism of a default maybe minor.

Linking to dividend paying stocks, when a company does not have money to pay their debts, the lawyers sweep in to control the process and bondholders get paid first, equity or stockholders get paid last. When you get paid last, there are cents on the dollar and time is not your friend. This is why as an investor you need to know when to sell or look for alternatives through simple key metrics. If an investment is bought when the company is profitable and can pay a dividend, if any of that changes you do not love the company, expect it to rebound, you take your losses and move onto other companies. If you love the company, you can wait and buy shares at a lower price because after reorganization, they will be lower. Know why you buy with some key metrics.

There are more questions than answers, till the next time – to raising questions.