Pact Stirs Interest in Czarist Bonds
Speculators are taking an interest in defaulted imperial Russian bonds since the Soviet government signed an agreement in London in mid-July to settle claims going back to the 1917 Bolshevik revolution.
Junk bonds in the truest sense, Russian paper had been bought and sold recently as much for its souvenir value as for any hope of payment. But since the Soviet agreement, the market price of the czarist bonds has quadrupled from around 2% of face value to between 7% and 12%, according to Vickers da Costa Ltd., a British securities firm. For each bond originally worth 100 pounds sterling, the price has climbed from the equivalent of $3 to between $11 and $18.
“I had 75 calls in one day for (dollar-denominated) Russian bonds,” said Mel Ehrlich, a bond trader with Thomson McKinnon Securities in New York. “Everyone is looking to buy, but nothing is being offered.” News of the British settlement drove the price of defaulted Russian bonds up to $2 bid, $5 asked from $1.50 bid, $3 asked for each $100 of face value.
Terms of Accord
The Soviet Union is believed to have decided to honor the bonds, repudiated after the fall of Czar Nicholas II, because it wishes to enter the Eurobond market to offset the decline in the price of its oil exports. Without acknowledging the bonds, the Soviet Union was unable to raise more money from British creditors.
The Anglo-Soviet accord, signed by Foreign Secretary Sir Geoffrey Howe and Foreign Minister Eduard Shevardnadze, calls for the Soviets to make payment on about 50 million pounds ($75 million) in pre-revolutionary Russian bonds. The Soviets will use 45 million pounds that have been held at Baring Bros., the merchant bankers who handled the czarist regime’s business interests.
In addition, the British and Soviet governments agreed to settle 2 billion pounds in Soviet war claims against Britain, for British involvement in Russia after the revolution. Under that agreement 2.65 million pounds in another Baring account will be turned over to the Soviets.
The announcement spurred hopes that another communist regime, the People’s Republic of China, would decide to honor 61 million pounds in repudiated bonds issued by a previous government as a condition for re-entering Western money markets. However, the estimate by the Financial Times that holders of Russian bonds could expect to receive about one-tenth of their assets sent the price of Chinese bonds reeling on the London Stock Exchange as investors realized there was little hope of full repayment. The price fell from 35 pounds per 1,000 pounds face value to 25 pounds.
There is no longer a market for Chinese bonds in the United States despite the $30 million in Chinese debt outstanding, including $5.5 million issued in 1919 under President Hsu Shi Ch’ang that was repudiated 20 years later by Chiang Kai-shek. Next to Russia, the largest single debt in default belongs to Cuba. In 1960, Cuban President Fidel Castro defaulted on $2 million in obligations his country incurred between 1930 and 1953.
Holders Filed Suit
After passage of the Foreign Sovereign Immunities Act of 1977, bondholders filed suit in U.S. courts against the Soviet Union and the People’s Republic of China. They won default judgments of $41 million against the Chinese and $192 million against the Soviets. The State Department objected that the 1983 judgment against China would damage international relations, so the judge reversed the decision, which is being appealed.
The judgment against the Soviet Union was issued in March of this year. Edward M. Sills, a New York attorney who was instrumental in bringing both the Russian and Chinese suits, said recently, “The precedent in Britain is proof of recognition of the legitimacy of claims” against the Soviet Union.
