Dividends and US will not renew licence allowing Russia to pay international investors

Although not many individuals invest in country bonds outside of their own country, if you do there are a variety of legal measures put in place to ensure the money gets paid by the country and can be deposited into the account of the bondholders. Most of the time investors do not pay a great deal of attention to them, because they are in the fine print of the prospectus, what an investor is concerned about will the money be in the account when it suppose to be.

In the case of Russia bonds, part of the prospectus was a licence approved by the Treasury department that allows American banks to accept the money and pay the bondholders. The two biggest banks which are involved in the transactions are JPMorgan Chase and Citibank.

In an article by Ken Sweet and Fatima Hussein of the Associated Press, the Treasury department has decided because Russia is still in the Ukraine fighting, the licence to process any dollar-denominated bond payments from Russia will not be renewed. This means even though Russia has the money (from oil sales) to pay, the banks can not process the transactions and Russia will default on its bonds.

The US government gave a longer period of time for institutions to sell their bonds and according to Jay Auslander, a prominent sovereign debt lawyer, most of the institutions have sold and those who still hold Russia bonds are either distressed debt investors or those willing to wait to litigate it out over the next few years.

Russia was anticipating the move and prepaid 2 bonds that were due in May to get ahead of the deadline. The next payments Russia needs to make is June 23, which will not be paid because the banks will not process the payments. Russia will have a 30 day grace period and then they are in default unless the war in Ukraine is over. It is likely Russia lawyers will be in court to restore its standing, but the elephant in the room is the war in Ukraine.

Linking to dividend paying stocks, in the prospectus of all companies are mechanisms which can be used in the case a company goes into bankruptcy or defaults on its debts. Ideally, your investments stay away from the cases because your money is tied up for months and you will only get back cents on the dollar. One way to avoid it, is buy profitable companies.

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

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