This week, the Bürgenstock Peace Conference on the Ukraine conflict is taking place without the involvement of the warring party, Russia. The USA and the EU have imposed extensive sanctions packages against the aggressor, which have largely been adopted by Switzerland and also affect the financial sector. Prominent voices, especially from private banks (most recently Renaud de Planta), have repeatedly criticized our country's copy-paste approach since then.

Regardless of how one assesses the meaningfulness of the Bürgenstock Conference, it is sure to attract public attention. And the opportunistic approach of the Swiss sanctions regime will continue to provide material for discussion in the financial sector.

Russia in the Swiss Market

Largely flying under the media radar, however, are the seven Swiss franc bonds from Russian issuers on the SIX Swiss Exchange. These include five bonds from Russian Railways, as well as one bond each from VTB Bank and Gazprom. This is no small matter:

The nominal value of the railway bonds, including a «perpetual» bond with a call option for the issuer, amounts to a total of 1,450 million Swiss francs – with two issues even carrying the «Green Bond» label, thus being counted in the sustainable bonds segment on the SIX. The two other Russian issuers are VTB Bank with 350 million and the energy company Gazprom, which has 500 million Swiss francs in the market.

Not Directly Sanctioned

The only bond regularly traded on the exchange is the 2021 Gazprom bond, which matures in 2027. Gazprom is not directly sanctioned and has been able to pay the interest so far, but it cannot be described as a normal market.

The bond has not been traded for months, and the price remains at 44 percent. Russian Railways and VTB Bank are affected by the sanctions regime and have therefore been traded «flat» since 2022, i.e., without accrued interest, as both issuers do not pay the interest or – the worst-case scenario for bondholders – the nominal value. This is the case with the 2017 railway bond, which was due to mature in October 2023.

Dried-Up Trading

Payments are failing because Russian Railways and VTB Bank cannot find a bank to process payments for them due to the sanctions. Clearing systems refuse to process the payments, and foreign authorities do not grant corresponding exemptions.

This is unusual: normally, a default occurs when the debtor runs out of financial means. This is not the case here; in principle, the willingness to pay the interest and repay the principal should also be present.

Huge Differences

However, it is typical for bonds that have been in distress for some time that only sporadic trading takes place, prices are in the single-digit percentage range, and the difference between buying and selling prices is huge.

For those who want to understand in detail how the Russian bonds are structured, what exactly happened, and what a technical default is, the three-part study by ZKB analyst Adrian Knoblauch on Russian Railways is recommended. Knoblauch confirmed to finews.ch that his statements (part 3 was published in October 2023) are still current.

At present, the overall situation shows no signs that the deadlock surrounding the Russian Swiss franc bonds could change. The expectation that a significant course will be set at Bürgenstock is low, and the third reconstruction conference for Ukraine taking place in Berlin this week also serves more as political symbolism.

Speculation on Tsarist Bonds

Back to the bonds: whether Russian Railways and VTB are indeed willing to meet their obligations will only be definitively known once the technical hurdles are removed with the lifting of sanctions. In the meantime, bondholders might find comfort in reading a work by André Kostolany (1906-1999).

In «The Art of Thinking About Money,» Kostolany describes how, starting in 1989, he bought up distressed Tsarist bonds of the Romanov dynasty from 1822 to 1910 at low prices. These bonds, which had not been serviced by the Bolsheviks since the Russian Revolution in 1917, were long considered the prototype of debt securities irrevocably lost due to political events and, reasonably, only of interest to collectors of historical securities.

Clearing Old Debts as a Door Opener

Kostolany closely observed Mikhail Gorbachev's détente policy in the 1980s and speculated that the new Russia would definitely want to return to the international capital market. And indeed, in 1996, it happened. Russia returned to the global financial stage with a dollar bond. France made it a condition that the holders of the Tsarist bonds be compensated by Russia – and stock market speculator Kostolany cashed in tens of millions.

«For me, who bought at five francs, it means a profit of almost 6,000 percent.» After this breakthrough, institutions, companies, and banks from Russia became welcome «capital market-capable» guests who were also invited to Switzerland by Credit Suisse and UBS.

Talkative and Prolific Writer

A good sense of observation, a dose of composure, and the ability to act at the right moment – these are qualities that those who have not yet parted with their Russian bonds must also possess. History suggests that bondholders can hope to see at least a portion of their money again someday.

Kostolany was talkative, prolific, gave interviews until shortly before his death, and enjoyed his cult status. Unfortunately, we can no longer ask the grand old man of the stock market how he would assess the situation today.