Why a Bear Market Is an Investor’s Best Friend

In the USA, both the S&P 500 and the Nasdaq are in bear market territory. A bear market is often taken to mean a 20% fall. That’s either from a recent peak, or over a set period of time.But generally, investors tend to think of any sustained upwards run as a bull market. And any significant downwards spell is a bear market. Typically, the average bull market has lasted around five years. The average bear, meanwhile, continues for a little more than a year.

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Might long-term investors be better of if that was the other way round, with more falls than rises? Wouldn’t we have more opportunities to buy cheap shares? To answer that, I can’t think of anything better than looking at how the billionaire boss of Berkshire Hathaway, Warren Buffett, deals with stock market falls.

In the few weeks after the Covid-19 pandemic struck, the S&P 500 fell 30%. The recovery was surprisingly fast, with the index regaining its ground by August. The FTSE 100 took quite a bit longer, mind. What happened the next year, in 2021? The S&P 500 gained 28.7%, while Buffett’s Berkshire Hathaway slightly bettered it with 29.6%. Buying shares while they were depressed by the pandemic was clearly a good plan.

Major bear market
But that’s nothing compared to the carnage resulting from the the financial crash, which kicked off in 2007. Between a high point in October that year, and the beginning of March 2009, the S&P 500 crashed by a whopping 56%.

Berkshire Hathaway suffered too, albeit with a softer fall of 32%. Now what do we see if we wind forward a decade? From the depths of the banking crash in 2009, the S&P 500 had gained 280% by the same point in 2019. Buffett’s shareholders did a bit better on 290%, and they’d started from a significantly lower initial fall.

Just like the Covid market slump, the financial crash provided investors with a great time to buy. And those who were panicking and selling while shares were down? Well, we can see what they missed.

Fear and greed

Buffett is famed for buying heavily when he sees great companies unfairly marked down. In his 1986 letter to Berkshire Hathaway shareholders, he explained how he avoids trying to time the market bottoms. Instead, he said: “Our goal is more modest: we simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.

That approach to bear markets has served Buffett, and his shareholders, well.From Buffett taking control of Berkshire Hathaway in 1965 up to the end of 2021, the S&P 500 managed a total return (including dividends) of more than 30,000%. Berkshire, meanwhile, soared by a total of 3.6 million percent!

We’re not all going to be as good as Buffett. But even investors who make regular purchases in an index tracker will benefit from bear markets over the long term. The simple truth is that when markets are down, we can buy more shares for the same money.

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by Alan Oscroft

Source: Why a bear market is an investor’s best friend – The Motley Fool UK

Critics by: principal.com

If you have reviewed these basics and you still have money at the end of the month, here’s a quick look at further investment options to consider.

1. Increase your deferral to your 401(k) or other workplace retirement plan.

The maximum amount you can contribute each year through elective salary deferrals is $19,500.1 And if you’re 50 or older, you can also make a “catch up” contribution of up to $6,500.2

“Bumping up your deferral, even by 1 or 2%, may not seem like much. But with the power of compounding earnings, it can make a big difference over 20 or 30 years,” says Heather Winston, CFP®, assistant director of financial advice and planning for Principal®. Also, weigh the difference between saving in a tax-deferred account vs. a taxable one.

Winston says if your account has taken a dip, increasing your contributions may help you reach your retirement goal sooner. If the markets have dropped, the money you defer to your retirement plan may go further by allowing you to buy more shares.

To get started: If you have a retirement account from your employer with services by Principal, you can log in to increase your contribution. First time logging in? Here’s how you create an account.

2. Add to your traditional or Roth Individual Retirement Account (IRA).

Good news: You have until July 15, 2020, to make a 2019 contribution to an IRA, thanks to recent legislation. (And you can always make a 2020 contribution now, too.)

The maximum annual contribution to a traditional IRA is $6,000. If you’re 50 or older, the IRA catch-up contribution limit is $1,000. (Read the basics of IRAs.)

Depending how much money you make and if you’re not covered by a retirement plan at work, you may be able to deduct all or a portion of your traditional IRA contributions from your taxes (details are on the IRS website). The more you save today, the more you’ll likely have years down the road.

With a Roth IRA, you can contribute up to $6,000 per year using after-tax money. If you’re 50 or older, you can add an extra $1,000 per year. To contribute the full amount to a Roth IRA, you need to make less than:

  • $124,000 if you’re single or file as head of household.
  • $196,000 if you’re married filing jointly.

You can withdraw your annual Roth IRA contributions without taxes or penalties at any time. If you have earnings, you can withdraw them tax-free in retirement.3

To get started: Review our IRA solutions to see what may be best for you.

Tip: Monitor and rebalance. If you’re investing in the market through a retirement plan, IRA, stocks, or mutual funds, consider putting this on your to-do list annually: Rebalance your portfolio (PDF) and make sure you have a diverse mix of investment options within various asset classes. A financial professional can help you learn how to do that.

3. Open a brokerage account, if you don’t already have one.

If you’ve never invested in stocks and mutual funds outside of your workplace retirement plan or IRAs, you could start by opening a brokerage account. (Not sure if you’re ready? Read “Four signs you’re ready to start investing.”)

You’ll need to know your risk tolerance. A risk profile (PDF) places you on a scale somewhere between conservative (more averse to risk) and aggressive (more tolerant of risk). Your profile can help you select investments and build a portfolio at a level of risk you’re comfortable with, while continuing to work toward your goals.

This year is a good test of investors’ tolerance for risk. If you find yourself worrying about whether your portfolio is gaining or losing day-to-day, or certainly if you’re losing sleep, you may need to adjust your risk profile. When your risk tolerance matches your investment portfolio, volatile times can be less concerning for you.

To get started: Connect with a financial professional to discuss your options.

Asset classes you might consider

If you invest, consider diversifying—spreading your money across multiple types of investments—to help reduce the risk of losing money.

  • Large companies and technology stocks will likely continue to perform well.
  • Look at small companies and sectors like energy, materials, consumer discretionary (non-essential goods and services), and financials to improve.
  • Stocks in emerging countries may perform better than those in developed countries outside the United States.
  • For bonds, go for higher yields on high quality corporate and municipal bonds at short-intermediate maturities.
4. Set aside money in a 529 savings plan for a child or grandchild.

A 529 savings plan allows you to invest your money to be used for qualified education expenses such as college, apprenticeship programs, and K-12. This includes tuition, room and board, mandatory fees, and textbooks. You designate how and where it’s spent.

Before opening an account, get a full understanding of the plan, including its tax benefits, fees, expenses, and investment options. You can open a 529 plan offered by any state, so shop around for the one that best suits your needs.

To get started: If you’re interested in learning about our 529 plan, visit scholarsedge529.com.

5. Contribute more to a Health Savings Account (HSA).

If you’re enrolled in a High Deductible Health Plan (HDHP), you can add a total of $3,550 a year for single coverage or a max of $7,100 for family coverage in 2020. If you’re over age 55 but under 65, you can also make “catch-up” contributions to your HSA, to the tune of $1,000 more per year.

An HSA offers a triple advantage on federal income taxes: Money put in isn’t taxed, it grows tax-free, and you’re not taxed when you take money out for medical expenses. Plus you decide how the funds are invested, and how you’ll use the money for health care expenses.

To get started: Talk to your employer’s human resources department about how to contribute more to an HSA associated with your HDHP.

Founders of $10 Billion Crypto Hedge Fund Have ‘Ghosted’ After Bets Go Bad

The co-founders of an influential multi-billion-dollar crypto hedge fund have suddenly gone MIA right at the moment that people want their money. Days of swirling rumors have been followed by harder evidence that Three Arrows Capital, or 3AC, is ghosting its business partners as it attempts to avoid insolvency after the firm overleveraged itself ahead of the recent “crypto winter,” which has plagued the industry and led to a steep decline in crypto prices.

Now, firms are scrambling to distance themselves from 3AC to assure customers that their funds won’t go down with the ship run by Zhu Su and Kyle Davies, two childhood friends who suddenly found themselves wielding billions in the Wild West of emerging crypto markets. “Losing a bet is one thing, but at least be honorable and not drag others into your bets who have nothing to do with it. Certainly don’t ghost on everyone since potentially, they could’ve helped you,” the head of trading at a firm that does business with 3AC said on Twitter.

The largely self-funded hedge fund has become a prominent investor in almost all arenas of the cryptocurrency industry, as well as a prolific borrower, making its inability to meet margin calls over the last week—money a firm has to pony up to cover losses—a subject of concern throughout the sector.

Rumors of issues at 3AC started to percolate over the last week, as crypto prices plunged and evidence emerged that the firm was frantically unloading tokens. “They’re not responding to anyone,” an unnamed source at a crypto trading firm told The Financial Times. As the frustration grew louder, 3AC’s normally prolific co-founders went silent, until Su sent out a cryptic and ominous tweet on Tuesday. “We are in the process of communicating with relevant parties and fully committed to working this out,” he wrote, without any additional context. He has not tweeted since, nor has Davies.

The head of trading at the Hong Kong-based firm 8 Blocks Capital, Danny Yuan, released a statement on Wednesday saying that 3AC had stopped responding after 8 Blocks requested a large withdrawal on Monday, June 13. After 3AC didn’t respond, a member of Yuan’s firm noticed that “~1m was missing from our accounts with them.” Additional attempts at contact went nowhere, and 8 Blocks Capital went elsewhere for information.

“What we learned is that they were leveraged long everywhere and were getting margin-called. Instead of answering the margin calls, they ghosted everyone. The platforms had no choice but to liquidate their positions, causing the markets to further dump,” Yuan said. In other words, 3AC had bet on crypto prices going up with borrowed funds (or “leverage” to use financial speak) meaning that any gains are higher but losses hurt much more. Yuan then called on platforms holding funds associated with 3AC to freeze them.

Zhu and Davies made their first public comments in an interview with the Wall Street Journal published on Friday morning, where they said that they were exploring asset sales and “rescue by another firm,” the outlet reported, and hoped to secure an arrangement with their creditors to give the firm some runway.

The apparent crisis afflicting 3AC is already sending ripples through the industry. On Thursday, the yield generation platform Finblox said that the company would pause reward distributions and limit withdrawals for all customers as it evaluated the effect of 3AC’s financial stress on its platform. 3AC is an investor in Finblox, the company said. 

The crypto lender BlockFi would not confirm if BlockFi had liquidated 3AC’s position, saying in a statement to Motherboard that it is against company policy to “comment on specific counterparties.” But BlockFi added that it “exercised our best business judgment recently with a large client that failed to meet its obligations on an overcollateralized margin loan.” (Unnamed sources told The Financial Times that BlockFi had indeed liquidated 3AC’s position.)

The stench of 3AC is so strong that even those who are not attached to the company have felt it necessary to distance themselves. Tether, the stablecoin currency, for one, issued a statement calling rumors that it had lending exposure to 3AC “categorically false.”  

The question is whether 3AC is a canary in the coal mine for crypto hedge funds, or just an overzealous fund that took too many risks. Mike Novogratz, the founder of Galaxy Digital Holdings, for one, has said he expects two-thirds of crypto hedge funds to soon fail.

Since its founding in 2012, 3AC has become one of the largest crypto hedge funds in the world, and its demise could cause trouble throughout the sector. Zhu and Davies, friends since high school who attended Columbia and joined Credit Suisse as derivatives traders together, started the fund while they lived in an apartment together, and have since become rumored to be “among the world’s biggest crypto holders,” according to Bloomberg.

3AC mostly (and maybe only) managed the co-founders’ own money, which Zhu claimed allowed 3AC “the ability to make very good decisions on market timing.” It also allowed for unusually large, risky bets, and for a while, the firm achieved astonishing results. The analytics firm Nansen estimated 3AC held $10 billion in blockchain assets as of March, and the company has investments all over the crypto ecosystem. As of December, that included a stake in the world’s biggest Bitcoin fund, the Grayscale Bitcoin Trust, that reportedly exceeded 5 percent.

 To increase the size of its bets, 3AC borrowed money from a number of firms, dramatically increasing its potential windfall. But when the crypto market started to crash, 3AC got hit hard. The hedge fund had invested in places like the play-to-earn game Axie Infinity and the Solana blockchain, whose token values have crashed in recent months. It also invested in Celsius, a crypto bank that has suspended withdrawals indefinitely amid rumors of insolvency. 3AC’s worst bet may have been Luna, a cryptocurrency that plummeted to near-zero in a dramatic implosion.

Now, 3AC appears to be scrambling to find money wherever it can, such as by selling massive amounts of tokens. One NFT fund the company had backed even moved all of its 70 pieces of digital art on SuperRare, which it had spent more than $20 million collecting, to a single address, indicating asset consolidation.

Ahead of the crash, Zhu and Davies professed an almost religious devotion to the potential of cryptocurrency. The libertarian Su had repeatedly pushed his “supercycle” thesis publicly, claiming crypto prices would continuously rise as it gained prominence relative to government currencies. “I also think we are entering an era where the potential of Bitcoin to become one of the key reserve currencies of people and nations is becoming clearer than ever,” Zhu told Bloombeg in April. “It will not be a smooth ride, but it will be a highly meaningful one for those who take the journey.”

On May 27, Zhu admitted that his grand supercycle theory was “regrettably wrong,” adding that “crypto will still thrive and change the world every day,” comments that Davies echoed in the Wall Street Journal. “We have always been believers in crypto and we still are,” he said.

By Maxwell Strachan

Source: Founders of $10 Billion Crypto Hedge Fund Have ‘Ghosted’ After Bets Go Bad

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SoftBank’s Startups Insist The Bruised Investor Still Expects Growth Despite The Economic Downturn

The economic storm is upon us, but it hasn’t changed SoftBank’s expectation that its portfolio companies will continue to prosper if only they focus on product and growth. That’s the message Masayoshi Son’s Japanese conglomerate is sending to its startups even as SoftBank posted a bruising $27 billion loss over the last fiscal year as inflation spirals, war siphons resources and interest rates head skyward.

Forbes contacted around half of SoftBank’s Vision Fund portfolio companies to learn how tech’s largest investor was advising founders to weather a slowdown that has already erased billions of dollars from the valuations of public and private technology companies.

“No matter we are in a bear market, they still think that the most relevant thing is growth, and product, and that from the founder’s perspective is great,” says Juan Urdiales, CEO of Spanish hiring platform Jobandtalent, which raised $120 million in a SoftBank-led round in March 2021. Urdiales is not alone.

Forbes spoke with 20 other founders out of a pool of 300 startups worldwide backed by SoftBank’s $140 billion Vision Fund 1 and 2. Founders such as Kevin Gosschalk of Captcha maker Arkose Labs, say they were told that “focus” and “lean” growth were the priorities in an economy sagging under rising interest rates and untamed inflation

As signs of a bear market appeared on the horizon this year, SoftBank sharply dialed back the pace of its financings after making a record 183 investments last year. It has made just 32 investments since the start of the war in Ukraine at the end of February, as SoftBank founder Masayoshi Son told investors that he intends to pull back on such deals by 50% to 75%.

That shift was preceded by an earlier change of strategy at the Vision Fund, the world’s largest tech investor. The London-based team shifted from the $1 billion wagers in capital-hungry companies such as Uber and WeWork it made with its Vision Fund 1, to make more traditional venture-style investments with cheques as low as $10 million spreading its chips across industries and countries.

“The reality is that if you want to continue investing multi-billion a year it’s very hard to concentrate on a few positions and find these very large companies that can digest that,” says Yanni Pipilis, EMEA Managing Partner for the SoftBank Vision Fund.

As a minority investor in many of the Vision Fund 2 companies, SoftBank had a smaller role to play in talks about a startup’s future, says Pipilis. “So the discussions we have are more often at a board level are advisory rather than telling founders what they should do,” he says. “There’s no one-size-fits-all approach but of course in an environment like this one we will look at your cash burn, hiring, marketing plans and see how we can adjust that to potentially increase your runway.”

SoftBank has, like many of its rivals in Silicon Valley, refocused on European startups over the past 18 months after valuations and founders’ demands in the U.S. surged. SoftBank nearly doubled the capital allocated to European startups to 25% in its second fund after Vision Fund 1 was dominated by large American and Asian companies.

Even so, the speed and scale of SoftBank’s spending across its sprawling operations can lead to overlaps and confusion. Just days apart in April 2021, two separate Vision Fund teams invested over $3 billion in two Norwegian startups with rival warehouse robotics technology. The stablemates could soon be pitted against each other as online grocer Oda expands into Germany while Autostore seeks to power Germany’s retail giants.

Some of SoftBank’s rivals have struck a more cautious tone. In a memo to founders in its portfolio last month, Sequoia Capital issued a gloomy warning that “Cheap capital is not coming to the rescue” to bail out struggling startups. Tiger Global, SoftBank’s rival in what critics brand “spray and pray” investing in late-stage startups, has also faced major headwinds and has written off $17 billion across its portfolio.

In May, Tiger invested in 33 companies, down from 50 in January, according to Pitchbook. But despite the looming signs of a downturn, Tiger’s backers appear undaunted, raising $12.7 billion in March for a new growth fund, and is reportedly in talks to raise yet another fund focused on private markets.

SoftBank has come down to earth since this time last year, when it smashed Japan’s record for corporate profits on the listing of South Korean ecommerce player Coupang and the then-booming valuations of companies in its Vision Fund portfolio. Those milestones were before rising interest rates, sharp stock-market declines and fears of a recession hammered public and private tech valuations.

Meanwhile, banner Softbank investments such as Alibaba and ride-hailing app Didi have been swept up in China’s tech crackdown. SoftBank’s own share price has plunged 36% over the last year. It is also managing a $140 billion corporate debt pile, among the largest in the world, and a raft of high-profile executive departures.

Most recently, some of SoftBank’s biggest bets in Vision Fund 2 have started to wobble. Last month, Klarna, Europe’s most valuable startup, laid off a tenth of its employees and cut back expectations after posting a nearly $500 million loss last year. GoPuff, the $15 billion instant delivery app, is shuttering more than a dozen warehouses and laid off 400 employees in May. And View, a “smart glass” window maker, which raised $1 billion from SoftBank before going public via SPAC, is at risk of being delisted by the Nasdaq while trading at a 81% discount from its peak a year ago.

SoftBank’s star investment Alibaba, now trades at a 50% discount to its price last year, says Amir Anvarzadeh, a Singapore-based analyst with Asymmetric Advisors, who recommends shorting SoftBank. “Over the last few years, SoftBank’s transformation to become a venture capital firm has been a disaster,” says Anvarzadeh.

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SoftBank has been here before. Son was one of the biggest winners of tech investing in the 1990s, just before the dot-com bubble burst, thanks to massive bets on Yahoo and E-Trade. But the subsequent selloff saw SoftBank lose 99% of its market cap, and Son’s personal wealth took a major hit. Son revived SoftBank as a major telecom operator but has more recent brushes with disaster from multi-billion bets on failed startups like WireCard, Greensill Capital, and Katerra – each raising questions about SoftBank’s due diligence process. The WeWork saga in particular took a financial and reputational toll on both SoftBank and Son.

Founders interviewed by Forbes say they have also got the message from SoftBank that it can’t be expected to bail out a floundering startup. SoftBank has led scores of rounds for loss-making startups but now pushes for another investor to lead any subsequent rounds. “We deliberately embarked on a strategy several years ago of having rounds led by others, and being willing to participate and support rounds,” says Anthony Doeh, a partner at SoftBank Investment Advisers.

“As a founder you should never count on continued support from your investors financially,” says Rob van den Heuvel, CEO of Netherlands-based shipping startup Sendcloud, which raised $175 million in September in a round led by SoftBank. “Our business is doing well and they reiterated their support a couple of weeks ago. … I would understand if they don’t support businesses that are not doing well.”

Though for now, such factors have not shaken the confidence of its portfolio companies, outwardly at least. Urdiales says he was warned by other founders that SoftBank’s exposure to public markets could determine whether it was a long-term investor. “We have seen many investors who are tremendously affected by market trends,” Uriadales says. “You don’t want an investor that changes their mind every quarter.”

I joined Forbes as the Europe News Editor and will be working with the London newsroom to define our coverage of emerging businesses and leaders across the UK and Europe. Prior to

I’m a staff reporter at Forbes covering tech companies. Follow me on Twitter at @davidjeans2 and email me at djeans@forbes.com

Source: SoftBank’s Startups Insist The Bruised Investor Still Expects Growth Despite The Economic Downturn

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Russia Debt Default Could See the US Seize the Country’s Assets

The impending Russian debt default is likely to be one of the most difficult in history to resolve, and could even lead the US to permanently seize assets from the country’s central bank, according to a report from the consultancy Oxford Economics.

Russia is facing its first default on its foreign-currency debt since the aftermath of the Bolshevik revolution in 1918.

The US Treasury earlier this month blocked Russia from paying $650 million due on two bonds using funds held at American banks. Russia has instead tried to pay in rubles, but credit ratings agencies have said this would constitute a default.

Russia has a 30-day grace period from April 4 in which to pay in dollars. But thoughts are now turning to the next steps, and how bondholders might recoup their money.

Tatiana Orlova, lead emerging markets economist at Oxford Economics, said investors face a “very long and difficult” legal road. “Russia’s debt crisis will be among the most difficult in history to resolve, since the default has its roots in politics rather than finance,” she wrote in a report that was sent to clients Thursday.

One of the key problems is that political and financial relations between Russia and the West have completely broken down. That makes the usual default process, whereby bondholders and the government enter negotiations and thrash out a deal, seem unlikely to happen.

Orlova said another problem for bondholders is that Ukraine may lay a claim to Russian assets in international courts to pay for the rebuilding of the country. In that case, investors would have to weigh up whether they want to compete with the Ukrainian government for Russian assets.

The economist said the US might eventually end up seizing the money from the Russian central bank’s foreign currency reserves. Western governments have already frozen the bulk of the roughly $600 billion stockpile. Joe Biden earlier this year ordered that half of Afghanistan’s central bank reserves, which were also frozen, be made available as possible compensation for victims of 9/11 and to fund humanitarian support in the country.

“The US administration could possibly find a stronger moral cause for splitting the US-denominated portion of Russia’s FX reserves between Ukraine and bondholders,” Orlova said. Russia’s Finance Minister Anton Siluanov has said the government has fulfilled its obligations by paying in rubles. He said last week Western governments are forcing Russia into a default and threatened to take legal action.

It’s not just holders of Russian sovereign debt who may have to take to the courts to try to get their money. Orlova’s report said there is likely to be an “avalanche” of Russian corporate debt defaults, given that the US is taking a hard line and banning American banks from processing payments.

An international committee of banks last week deemed state-owned Russian Railways to be in default, after sanctions stopped the company from making bond payments.

There were roughly $98 billion of Russian corporate foreign-currency bonds outstanding as the war began in February, according to JPMorgan, with $21.3 billion owned by foreign investors.

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Source: Russia Debt Default Could See the US Seize the Country’s Assets: Economist

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A default would make Russia more of a pariah in the global economy. Selling bonds is a critical way that countries raise foreign currencies to fund projects and raise reserves of foreign currencies, among other purposes.

But the European Union is considering a ban on energy imports from Russia, which would further limit Russia’s ability to raise money in foreign currencies.Countries that have defaulted on their bonds have eventually been welcomed back to global debt markets, but memories of a default linger and Russia may have to pay more to borrow from foreign investors in the future.

A default would also be historically significant and fraught with symbolism. It would mark the first time Russia has defaulted on foreign bond payments in more than a century (though it did default on local currency debt in 1998). Russia’s predicament is yet another consequence of its invasion of Ukraine, according to Tim Samples, a professor at the University of Georgia who specializes in foreign investment.

“This is a reflection of just how far and how fast Russia has fallen from favor in Western capital markets,” he said. Not necessarily, but most investors will need to go through a protracted legal battle to try to get the money they are owed.

Although Russia was not a big seller of foreign debt, major hedge funds and asset managers, including Invesco and PIMCO, bought bonds. Russia has 15 bonds outstanding that are denominated in dollars and euros, and altogether, they are worth around $40 billion, according to Morgan Stanley.

Much of Russia’s debt was registered in the United Kingdom, which is where it’s likely that most of the court fights will take place. It can be a complicated process, and it will take a long time to resolve. After Argentina defaulted in 2001, several efforts were made to restructure the country’s debt. All told, negotiations lasted longer than a decade.

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Russia’s Creditors May Have To Choose Between Getting Paid In Rubles Or Not Getting Paid At All

Russia’s creditors face the unappetizing prospect of accepting debt payments in rubles after the U.S. Treasury decided Monday to block the Kremlin from using its dollar reserves.

The Russian currency crashed 40% in the days after President Vladimir Putin’s unprovoked attack on Ukraine but has mostly bounced back since. A default on the $636 million debt payment and further sanctions tied to alleged Russian atrocities could trigger another nosedive in the ruble’s value.

“If they can’t get their dollars, either because they’re blocked or Russia won’t pay them, and they are offered rubles and they can get access to them, they’d be smart to take the rubles,” said Jay Newman, a former portfolio manager for Elliott Management who spearheaded the hedge fund’s 15-year battle with the government of Argentina over bond payments. “Rubles at least are worth something.”

The U.S. Treasury froze Russian central bank assets held in the U.S. in February after the invasion of Ukraine, but made an exemption for debt payments that was set to expire on May 25. With Russia continuing its offensive for more than a month, however, and new images showing horrifying scenes of bodies of civilians on the streets of Bucha, Ukraine, the U.S. accelerated that timeline, blocking Russia from making debt payments to investors.

Until then, JPMorgan Chase and BNY Mellon, two New York-based banks, acted as go-betweens for Russian payments to creditors. Putin’s government continued to make payments on time throughout March, most recently with a $447 million coupon payment last week. Both JPMorgan and BNY Mellon declined to comment.

“On the one hand, there’s a sense that if a sanction target wants to use scarce resources to pay U.S. creditors back, why should we object?” said Robert Kahn, director of global macroeconomics at the Eurasia Group. “But if we’re making life easier for them by opening up these doorways, I do think that at moments like this, particularly in the context of the awful images we have seen in the last few days, the interest of creditors is just not given a very high priority.”

The Kremlin dismissed the notion on Wednesday that it’s at risk of not being able to make the payments during a 30-day grace period. Spokesperson Dmitry Peskov said Russia has “all necessary resources to service its debts” and insisted that payments could be paid in rubles if necessary. A U.S.

Treasury spokesperson said the move will deplete the resources Putin is using to continue the war. “Russia must choose between draining remaining valuable dollar reserves or new revenue coming in, or default,” the Treasury spokesperson said.

If Russia elects not to pay, it wouldn’t be the first time — a 1987 Forbes story covered a 96-year-old woman who was still waiting to be paid for czarist bonds her husband had bought in 1919 shortly after Russia defaulted on its debt during the Bolshevik Revolution.

Anton Siluanov, Russia’s minister of finance, said on state TV in March that about $300 billion of the country’s $640 billion in gold and foreign reserves has been frozen by sanctions. If Russia still has access to about $340 billion in reserves, the country appears to have more than enough to cover its total of $40 billion owed in international bonds, but Kahn said it’s not that simple and expects defaults to begin in the coming weeks.

“Dollars in a Chinese bank or gold in Moscow may be in principle unblocked, but it’s hard for them to take those and use them to buy the things they need,” Khan said. “My sense is that the usable reserves are really far lower than what the minister said.”

Russia will still be able to use revenue from sales of commodities like wheat, palladium and oil to meet its debt obligations. The U.S. has blocked imports of Russian oil, but other importing countries haven’t followed suit.

Meanwhile, trading in dollar-denominated Russian corporate bonds has skyrocketed, with investors hunting for bargains despite the reputational risk. The average daily value of trades as of March 24 was double the same period a year before and the most in two years, according to Bloomberg.

I’m a reporter on Forbes’ money team covering the wealthiest people and most influential firms on Wall Street. I’ve reported on the world’s billionaires for Forbes’ wealth team and was

Source: Russia’s Creditors May Have To Choose Between Getting Paid In Rubles Or Not Getting Paid At All

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