A Silver Lining to Russia's Sanctions-Busting Clause?

15 Pages Posted: 19 Oct 2022 Last revised: 6 Dec 2022

See all articles by Michael Bradley

Michael Bradley

Duke University - Fuqua School of Business

Irving De Lira Salvatierra

Duke University

Mark C. Weidemaier

University of North Carolina School of Law

Mitu Gulati

University of Virginia School of Law

Date Written: October 18, 2022

Abstract

In 2018, Russia began inserting an unusual clause into euro and dollar sovereign bonds, seemingly designed to circumvent future Western sanctions. The clause worked by letting the government pay in roubles if sanctions cut off access to dollar and euro payment systems. The clause received little scrutiny at the time, perhaps because Russia used a state-owned bank, rather than a global investment bank, as underwriter. But with the invasion of Ukraine and the ensuing sanctions imposed by the United States and other governments, the relevance of the clause has become clear. This Essay examines how the market reacted to the clause before and after the invasion. Our expectation was that the market would charge a premium for bonds with the clause. Investors bought euro and dollar bonds, after all, because they did not want to be paid in roubles. Yet contrary to expectations, investors seemed to prefer bonds that allowed for payment in roubles over bonds that did not. This surprising finding has considerable implications for other countries, which may lose access to foreign currency for reasons that are more benign than Russia’s war of aggression. Despite its sordid provenance, Russia’s sanctions-busting clause might turn out to be a positive innovation that could benefit countries facing unexpected crises. Indeed, had Ukraine included such a clause in its bonds, the benefit would have been enormous.

Keywords: Russia, Ukraine, sanctions, sovereign bonds, innovation, original sin

JEL Classification: G1, G15, K12, F34

Suggested Citation

Bradley, Michael and De Lira Salvatierra, Irving and Weidemaier, Mark C. and Gulati, Mitu, A Silver Lining to Russia's Sanctions-Busting Clause? (October 18, 2022). Virginia Public Law and Legal Theory Research Paper No. 2022-77, Virginia Law and Economics Research Paper No. 2022-28, Available at SSRN: https://ssrn.com/abstract=4249029 or http://dx.doi.org/10.2139/ssrn.4249029

Michael Bradley

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-8006 (Phone)
919-660-7971 (Fax)

Irving De Lira Salvatierra

Duke University ( email )

100 Fuqua Drive
Durham, NC 27708-0204
United States

Mark C. Weidemaier (Contact Author)

University of North Carolina School of Law ( email )

Van Hecke-Wettach Hall, 160 Ridge Road
CB #3380
Chapel Hill, NC 27599-3380
United States
919.843.4373 (Phone)

Mitu Gulati

University of Virginia School of Law ( email )

580 Massie Road
Charlottesville, VA 22903
United States

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