Just because I find the expropriation of Russian deposits in Cyprus wrong doesn’t mean that I’ve gone soft on Russia. To the contrary, my criticism of Russia and my criticism of the Cypriot confiscation grow from the same roots: a belief in the rule of law, and a deep dislike for the natural state.
A couple of stories along those lines. First, a Russian court permitted a Russian firm, Agroterminal, to walk away from an interest rate swap it had entered with the Italian bank Unicredit:
The court’s ruling was based on a clause in the swap documentation that says a party can unilaterally terminate if there are no outstanding obligations at that point. Agroterminal had made one of the swap’s quarterly payments to UniCredit Bank and terminated immediately afterwards, arguing that as the new quarterly payment had not been calculated, there was no outstanding obligation.
Put differently, per the Russian court’s interpretation, the party to a swap has the ability to walk away at any time between payment dates. Yeah, the market will totally work under that interpretation. It turns the swap into an option: each party has the choice to walk away when the swap is underwater immediately after each calculation date. Since the swap will be underwater to one of the parties, this means that the swap is a non-starter. Not a forward starting swap: a non-starting swap.
The lawyers quoted in the Risk piece attribute the court’s decision to ignorance and naivete. Actually, what is naive is that interpretation. Maybe the court was playing dumb, but it is pretty clear that Agroterminal had the home court advantage-literally. That is, the court was just favoring a Russian firm at the expense of a damn furrin’ bank. The decision is transparently silly: if one would take it literally, any floating rate claim (e.g., a floating rate bond) would be unenforceable between payment dates. The Russian court was looking for some fig leaf to justify stiffing the Italians, and it found it. Go figure.
Those contracts, which number at least 21, include a share of an $8.3 billion transport link between Sochi and ski resorts in the neighboring Caucasus Mountains, a $2.1 billion highway along Sochi’s Black Sea coast, a $387 million media center, and a $133 million stretch of venue-linking tarmac that will double as Russia’s first Formula One track.
Wow. I keep kicking myself for not taking up judo (but wouldn’t kicking be Karate-related? Whatever). Arkady is not just the best producer of steel pipe for gas pipelines, he’s also the best builder of transportation systems, highways, media centers, and Formula One tracks. His personal connection with Putin is no doubt totally coincidental: can he help it if he has such varied talents?
These two stories illustrate different aspects of the Russian natural state. The elites get fed. Kormlenie lives. Sometimes courts do the feeding. Sometimes the government feeds its friends, through contracts or restrictions on competition. But the natural state rewards the connected.
And this is Russia’s curse. This is why it is on the hamster wheel from hell.