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Streetwise Professor

March 19, 2013

Home Court Advantage, and the Further Miracles of Judo

Filed under: Derivatives,Economics,Politics,Regulation,Russia — The Professor @ 6:46 pm

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.

The second story: Putin’s judo buddy Arkady Rotenberg has made billions on contracts for the Sochi Olympics:

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.

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5 Comments »

  1. “for my friends – everything;
    for my enemies – the law”

    The “law,” such as it is.

    Comment by elmer — March 20, 2013 @ 7:27 am

  2. Isn’t the real crime the very sophisticated banking system intended to protect money stolen from other places throughout the world.

    Get it to our banks boys and no questions asked.

    Comment by pahoben — March 20, 2013 @ 8:48 am

  3. Don’t criticize my relatives! I am sure they deserve every penny they can wrestle out of Putin. These are high-takes fights.

    Comment by Vlad Rutenburg — March 22, 2013 @ 4:10 am

  4. This is the common trait of autocracies where all econic activity is ultimately controlled by the state. Interesting to think that the post Marxist state has thus trully alienated workers from the fruits of their laborious!

    Sorry to mention Laborious surplus value theory.

    Comment by sotos — March 23, 2013 @ 7:57 am

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    Pingback by The week that was – 25.03.2013 | The OTC Space — March 25, 2013 @ 3:39 am

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