The United States Has Opened Up A Whole New Can Of Worms With Adjusting The Concept Of ‘Sovereign Default’

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US credibility concerning international rule of law will be increasingly scrutinized

By Chris Devonshire-Ellis

The arguments over US sanctions and Russia over whether or not the country has entered into a sovereign default on its loans are likely to hasten further mistrust in the global financial system. Russia is actually one of the least indebted countries in the world and has taken its obligations to settle amounts due very seriously.

However, sanctions have frozen US$600 billion in assets the Russian state holds on behalf of its citizens overseas, and has also been barred from trading US dollars. While the loss of the US$600 billion can be absorbed by Russia, and the country has significant foreign currency, ruble and gold reserves back home, the problem lies in the letter of the bonds it has to fulfill. These specify payment in US dollars – which Russia cannot access and has been barred from purchasing or trading.

As a consequence, Russia is alleged by the US based ratings firm Moody’s to have defaulted on two Eurobonds worth US$100 million each on June 27th. Russia however said that it has not defaulted, having apparently sent the required amount of rubles to be converted to US dollars in settlement. Moody’s and the US Government, have decided that is insufficient.

Moscow has firmly rejected these default statements, saying “These allegations of a default are absolutely unjustified, because back in May, the obligatory payment in the currency was fulfilled, and the fact that Euroclear withheld this money, or did not deliver it to the recipients is no longer our problem.”

There remains a lack of clarity over whether dollars or rubles were sent, however the result appears to be the same, the United States has refused to acknowledge the debt has been paid despite Russia wiring the appropriate funds. Politicians in the US and EU have been celebrating this as a victory in the battle to force Russia into economic subservience. It is likely to be pyrrhic.

A number of problematic issues arise as a result of this matter.

It redefines the concept of ‘default’ and ‘debt’
This means that even though the debtor has paid the amount due, if the recipient refuses to acknowledge receipt, the debt remains outstanding. The breaches the very nature of payment integrity and receipt. There are two sides to this;
It allows the debtor to remain in debt due to technicalities.
If this concept were to be extended downstream, it could mean legal arguments being developed to allow credit agents to keep debtors in their hands in order to continue to exploit them via a never-ending series of changing rules. That is becoming very close to legitimized usury and exploitation.
It allows the recipient to legitimately deny receipt and to withhold the money paid.
It remains uncertain what will happen to the money Russia has stated it has sent to settle the debt. In light of Russian assets being frozen overseas, it appears this too is now in danger of being seized. That calls into question the true ownership of the debt. Russia has remitted it, it has entered a mechanical payment system controlled by the recipient, who now denies payment has been received. This is getting very close to the borderlines of fraud and theft.

It also calls into question serious issues relating to international rule of law, where one country (the United States) is preventing another (Russia) from meeting its international obligations. This is what Russia and China are referring to when they state the current global and economic system is run on a Unipolar basis – the US, rather than a representative global body now makes the laws.

Fraudulent Claims and Third-Party Settlements
Pro-US camps, such as the Taiwanese bondholders owed money by Russia have stated that ‘Russia is in default because it invaded Ukraine’. However, the ‘invasion of Ukraine’ one can guarantee is not a defaulting factor in the bondholders contract, rendering the comment political-speak. One also has to wonder about the Taiwanese debt-holder – has a deal been done with the US to assist them with the inconvenience of not having received their US$100 million? If so – that is running very close to fraud.

US Muscle Versus Credibility
While the United States has undoubtedly shown what it is capable of doing, there remain issues over whether this has been entirely legal. Law suits will inevitably be bought – and here one needs to follow the trail to where those will ultimately be decided. One suspects the United States – an odd choice given that they are an interested party and therefore not impartial. This then calls into credibility the entire US policy and influence on international law, and indeed its domestic laws. Deep State and the US Supreme Court after all have just overturned the Roe v Wade legislation concerning abortion, despite the fact that the vast majority of Americans disagree with the ruling.

That is an important coincidence as it brings into focus the credibility of how US laws are imposed both domestically and internationally by a small, yet powerful elite. Domestically, that, coupled with US Gun laws and the influence of the NRA may start to show off dividing lines in the US itself as concerns the legitimacy of US laws.

International Impact
It will certainly have an international impact, and the situation which Russia faces itself being thrust – a sovereign nation unable to pay its debts despite both having the means and wanting too. This will warn off nations having assets within reach of US legislators. Afghanistan was caught out last year, having its sovereign gold reserves, left for safe keeping in the United States, seized and used to pay for damages caused by 9-11. That money belonged to ordinary Afghans, who are now struggling in poverty and who have just suffered a devastating earthquake. The US confiscated (took) Afghanistan’s national gold reserves, and redistributed it to US nationals, regardless of the fact that it was Osama Bin Laden, a Saudi national, who orchestrated, planned, and ordered the World Centre attacks, and not an Afghani.

Many countries have turned to the United States to hold their gold reserves ‘for safe keeping’. Will asking for it back now be considered ‘an unfriendly act’?

Ultimately, the United States, and to some extent the European Union and the UK will no longer be seen as ‘safe havens’ for any money. That is because international laws can apparently be implemented and changed at the drop of a hat to prevent legal owners access to their own individual, and even sovereign assets. It is the global implications of what that means that will have far-reaching consequences, and quite probably create increasing distrust and fear of the United States, rather than any sense of security and knowledge that assets are safe under the rule of law.

The legacy for the United States is that it has been very obviously seen as making laws up as it sees fit. That is a definition not just of a Unipolar world in operation, but the imposition of George Orwell’s Big Brother come to life. The irony is that 1984 was once thought to be about communism.

Chris Devonshire-Ellis is the Chairman of Dezan Shira & Associates and assists foreign investors into markets in Asia. See:

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