(The opinions expressed here are those of the authors, professors of law at the Universities of North Carolina and Virginia, respectively.) By Mark Weidemaier and Mitu Gulati Oct 10 (Reuters) – Holders of Russian foreign debt surely wish U.S. President Donald Trump had fulfilled his promise to bring the war in Ukraine to a quick end, as payments on most instruments have been on hold since Russia’s invasion began. The clock for making claims may now be ticking. Russian sovereign debt denominated in euros and U.S. dollars stopped paying out in April 2022 after Western powers slapped sanctions on Moscow. The longer the conflict drags on, the more bondholders might wonder whether they need to do anything to preserve their right to payment. PRESCRIPTION PANIC? Under normal circumstances, when a bond issuer fails to pay, the bondholder must file suit within the relevant statute of limitations. These statutes exist to protect both defendants and courts from stale claims. However, in many jurisdictions, parties may agree to shorten these limitation periods. Russia’s bond contracts have so-called “prescription clauses” seemingly designed to do just that. These clauses say that bondholder “claims” for principal and interest “shall become void” unless “made” within three years of the payment’s due date. It has been well over three years since Russia’s first missed payments on April 4, 2022. Does this mean bondholder claims are starting to become void? The answer may not be so obvious. To begin, it is unclear what “making a claim” even means. How formal does this action need to be? What type of communication will suffice? Courts are rarely called upon to interpret prescription clauses like the one used by Russia, so there is limited precedent to draw on. There is some, however. In litigation against Argentina in 2022, a U.S. federal court in New York held that investors had made a claim against the country simply by asking it to enter an agreement to suspend the limitations period. Russia’s bonds are governed by English – not New York law – but perhaps UK courts would take a similar approach. Russia’s bonds are held via depository institutions that reportedly send automated reminders of payment due dates to the issuer. Might that form of communication be enough? Many legal experts are skeptical, but the limited case law here leaves open the possibility. EXERCISE IN FUTILITY Russian bondholders could reasonably make the argument that, given sanctions, they ought to be excused for failing to “make” their claims within the prescription period. After all, even if bondholders had taken legal action and received a favorable judgment in English courts, they would have had little hope of enforcing it against frozen Russian assets, especially given that Russian bonds do not include the waivers of sovereign immunity typically found in government bonds. Meanwhile, the Russian government has publicly maintained that it intends to pay once sanctions are lifted. Given both the futility of filing a lawsuit and the government’s apparent willingness to pay, what would be the point of requiring bondholders to undertake formal steps to “make” claims for missed payments? Still, the text of the prescription clause seems clear. Regardless of whether it is sensible, “making” a claim is required within three years, and bondholders didn’t do that. EXTENUATING CIRCUMSTANCES Not so fast though. The presence of an ongoing war complicates matters further. There are several old U.S. cases in which courts ruled that the statute of limitations could be extended during a period of war. The logic of these cases seems to have been that the war effectively denied creditors access to the courts. That logic could potentially be extended to contractual prescription periods, when war-related sanctions make payments essentially impossible. But even if that’s the case and Russia resumes making payments, including catching up on missed payments, after sanctions are eventually lifted, there will still be more questions. Ordinarily, if there is an extended delay in making payments, the debtor will owe additional interest for the delay period. This is rarely disputed, and the arguments tend to be over what interest rate pertains to the delay period. There are, once again, old cases related to claims made during war time that are relevant here, but this time, they aren’t in creditors’ favor. These cases typically hold that interest does not accrue during the period of delay when the cause of the interruption is a war. For a variety of reasons, the logic of these cases may not apply here. For one, Russia is clearly the aggressor in this war and thus is responsible for its current inability to pay, given that it could restore this ability simply by ceasing its aggression. Under those circumstances, many would think it perverse to deny investors interest while they wait. Still, the law here is not as clear on this point as many investors might assume. Either way, with the war likely to drag into its fourth year, Russia’s willingness to pay foreign bondholders may be diminishing. Holders of Russian debt may therefore soon determine that the risk of doing nothing – and banking on Moscow’s eventual compliance – is just too high. (The views expressed here are those of the authors, Mark Weidemaier and Mitu Gulati, professors of law at the Universities of North Carolina and Virginia, respectively. They host the podcast, Clauses and Controversies, where they speculate about fun sovereign debt contract matters). Enjoying this column? Check out Reuters Open Interest (ROI), your essential new source for global financial commentary. ROI delivers thought-provoking, data-driven analysis of everything from swap rates to soybeans. Markets are moving faster than ever. ROI, can help you keep up. Follow ROI on LinkedIn, and X. (Writing by Mark Weidemaier and Mitu Gulati; Editing by Anna Szymanski.)
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