Hypothetically, say I owed hundreds of millions of dollars to Russian banks, high-net-worth Russians and western banks that made loans backed with Russian collateral? In light of current events, what type of financial challenges could I expect?
That’s an interesting question. You might actually come out ahead: “Yuri, i tried to send you the payment, but with Russia cut off from SWIFT, I guess it didn’t come through. You’ll have to set up an alternative payment system.”
Well, there are workarounds to using SWIFT. You can use the SPFS System which was setup by the Russian central bank after they invaded Crimea. There is also the CIPS Network setup by China. As you can imagine both were setup to avoid being beholden to the west and the SWIFT network and having exactly something like this happen.
That said, SPFS and CIPS have far fewer member banks and are more expensive to use. Whether a Russian bank can demand that you go find one and make your payment I am not sure although I bet they would say that you have to.
If you have money in a bank in Russia, SPFS or not, I am betting Russia will not be sending money out. They had a run on the banks and I think they’ve just stopped handing money out. If you need that money to pay a debt then it sucks to be you. The people you have to pay will not care that your money is in Russia and you cannot get to it and will see it as a default.
I think the big issue is how Russia will pay bond holders. They likely can’t/won’t. I am not sure what happens then but, if I were a person holding some of those bonds, I would be worried that they have become worthless. Also, whatever happens, in the future Russian companies and government will find it a lot harder to sell bonds (meaning they become more expensive for the government/companies to sell). That will hurt the Russian economy for years.
But that’s a different question from the OP, who seems to be asking what happens if you owe Russian debt. If you own Russian debt, well, you’re hosed. [Technical financial term.]
For example, the then-brand-new Soviet Union said back in 1918 that it was not liable to pay the bonds that had been issued by the Tsarist regime during WWI.
After the fall of the USSR, Russia did eventually pay the bonds, primarily to descendeants of bond-holders in France: in 1996, just 78 years after the repudiation:
Just to nitpick your terminology, when you say someone “has” Russian debt, that usually means that Russia owes them money - that some payment due from Russia is owned as an asset.
In your scenario, if you owe money to some sanctioned Russian entity -
…well, the challenges are not really financial. You still have the same liability, you’re not going to get the windfall of the debt disappearing. It’s more a questions of legal compliance with whatever sanctions are in place. Ultimately, your own government would control what happens to any repayment, along the lines of what’s described here:
In the U.S., this is what happened in WWI and WWII:
See also a prior thread on this topic:
What happens to economic debt between belligerent nations?
In terms of major public debt, Russia has obviously tended to be a borrower rather than a lender from the West. Substantial Russian loans would often be politically motivated. According to this article (2019), Russia’s biggest debtors were Belarus, Ukraine, Venezuela, Cuba, Bangladesh. I guess any repayment from the second of those will be taken rather than given.
Normally, most loans of any magnitude will expressly spell out how and when the debtor is to pay, and in what currency. Not being able to pay according to that schedule doesn’t wipe out the debt, as @Riemann says, but it certainly could delay the payment being made. And if the debtor tries to pay according to the terms set out in the contract, but that mechanism no longer exists, then the principle of force majeure would likely come into play.
The lender couldn’t trigger an escaltor clause, I would guess, since the debtor tried in good faith to comply. The other issue would be interest. Normally a debtor who is late with payment has to pay interest, but if the debtor tried in good faith to make the payment, precisevly as set out in the contract, but was unable to do so, I think it would be hard for the lender to claim interest.
But this is exactly the sort of thing that keeps barristers in London and New York who specialise in trans-border finances busy. And well-paid.
Obviously no Russian entity can meaningfully demand that you do anything contrary to the laws of your own jurisdiction, whatever the contract terms might say.
Yes, this is a much bigger issue, but I think it probably needs its own thread, unless OP wants to expand the scope of this one.
I’m curious:
Does the exchange rate work in your favor?
If I owed a Russian bank 1 billion rubles am I in happy town now since the Russian ruble has been so debased I can purchase a billion rubles for a relative pittance?
Or will they tell me I owe $1 billion (US) and debased currency or not that does not change?
It depends what currency the loan contract says you’re to re-pay it in.
If it’s in rubles, you got a windfall. If it’s in US$, the lender gets a stable payment.
Just as an example of international loans, I once saw a prospectus for a loan being floated by a Canadian province, in Germany, that was to be paid in US$.
Wouldn’t you be able to set up some kind of escrow account with a third party, and communicate to the lender that, for the duration of the current unpleasantness, the regular payments will be made to that account, to be transferred to the lender once the situation permits such transactions again?
I’m sure I’ve heard of such arrangements for other such issues when there’s merely a legal dispute over a debt - the debtor pays into the account until the courts finally decide if the debt is legitimate or not.
Probably. And if there is subsequent litigation, doing something like that would help the debtor to establish good faith.
Now that we’re past the basic 10 post requirement for FQ, I can add that one can speculate that a certain individual in Florida is having his lawyers look into this very issue as we speak.
As a matter of interest, this is the mechanism for foreign exchange rate speculation. If you think the rouble will depreciate, you need to find someone who is willing to lend you roubles. You sell the borrowed roubles for dollars in the spot forex market. You now have a “short rouble, long dollar” position. At some later date, you must repurchase the roubles to repay the lender, and you hope that you can do so at a cheaper price.
For real currencies in functional markets, this is a routine matter. For a shit currency that’s in active collapse, it becomes prohibitively expensive to borrow (overnight interest rates go to infinity) because obviously nobody wants the other side of the trade.
As an aside, such clauses are not always enforceable. A famous example from American law were the Gold Clause Cases. The background was that prior to 1934, under the American version of the gold standard, the dollar was pegged to gold at a rate of $20.67 per ounce. In 1934, as part of the reaction to the great depression, the dollar was devalued to $35 per ounce. Many creditors owned debt that had a “gold clause” attached to it (such as a statement that payment had to be made “in gold coin” or something along these lines) and demanded payment of an adjusted nominal dollar amount so that the new dollar amount would correspond to the same quantity of gold. Congress adopted a resolution that nullified these clauses, and in the cited cases, the Supreme Court (narrowly) upheld this as constitutional.
Similarly, in some Central and Eastern European countries, there was, until a few years ago, a widespread practice of people taking out mortgage loans denominated in Swiss francs to finance their homes. The background to this was that interest rates in francs were much lower than those in the respective national currencies. When the franc appreciated, this meant that many borrowers now had much higher debt (converted into domestic currency) than before, so several of the jurisdictions in question adopted legislation to enact a forced conversion of the franc loans at a rate that deviated from market rates. It was a major loss factor for banks that were active in the region, and caused litigation; here is an example for news coverage of the saga.
Bottom line: Denominating your debt in a foreign currency or in gold sounds like a good protection if you’re the creditor and you don’t trust the stability of whatever the debt is denominated in, but there’s a risk that this protection gets legislated away.
Not meant to be a smarty-pants reply, (well ok yes it is) but aren’t you spelling that wrong? Shouldn’t that be “rubbles”? Nyet Komrade, the loaf of bread is 30.000 rubbles now 
So I’m not the only one who thought:
Donnie? Is that you??