The US Treasury banned the government from using American banks to make dollar payments on Russia's foreign-currency bonds, which could lead to a default.
Russia failed to make bond payments on Monday. The money was transferred to the National Settlement Depository despite the contracts demanding payment in dollars.
A default would cause a battle between bondholders and the Russian state.
Bondholders are not just hedge funds. Pension funds and retail investors are exposed to Russian debt through giant firms. War is testing asset-manager capitalism.
The law professor at the University of Virginia is an expert on debt. The situation is a mess that could lead to years of litigation chaos, he told Insider.
He gives his thoughts on what might happen next. The interview was edited for clarity.
Is Russia going to default?
It depends on what we mean by default. Russia is not going to be able to get money from bondholders. Is that a default or not?
Russia is likely to say that they are happy to pay. Our money is frozen because of the horrible Western governments.
I think the counterargument is that this is not an external event that you did not have control over. You could pay if you kept your hands off of Ukraine.
How long will it take for bondholders to try to get money from Russia?
This will be more difficult. The bondholders would form a committee and negotiate with the country, and the International Monetary Fund would make an estimation of how much they can pay. We have to figure out who is going to pay for the reconstruction of Ukraine.
Three-dimensional chess is what this is. The Ukrainian reconstruction bill is increasing every day because there is only a limited amount of assets.
Russia has a lot of foreign assets, but the number of claims on those assets is increasing at a rapid rate. If your claim is first, you will have an advantage.
Western governments understand that the game is afoot. I will bet everything in my small bank account that they are making plans to deter people from chasing these assets, saying that nobody is going to get ahead of anyone else by getting judgements.
Will Western governments sympathize with bondholders who invested in Russia?
They are going to have to have some sympathy. Pension funds or mutual funds hold a lot of the debt through Pimco. We all have retirement accounts in institutions that hold this stuff. It was rated very safe by the government.
What do you think is the most interesting about the debt crisis?
I study bond contracts. These contracts are the worst I have ever seen. They give Russia many advantages.
I would just be an investor. I have a debt contract that says Russia has the option to pay me in rubles. I did not mean to agree to that.
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