Speculators are taking an interest in defaulted imperial Russian bonds since the Soviet government signed an agreement in London last week 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 percent of face value to between 7 percent and 12 percent, 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 1/2 bid, 3 asked for each $100 of face value.
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 some 50 million pounds ($75 million) in prerevolutionary 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 reentering Western money markets. However, the estimate by the Financial Times that holders of Russian bonds could expect to receive approximately 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 1000 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.
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 U.S.S.R. 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 this week, "The precedent in Britain is proof of recognition of the legitimacy of claims" against the Soviet Union. He said he was hopeful of a settlement, but indicated that the type of agreement reached in London would not be acceptable to his clients, who want more than 10 cents on the dollar.
There are two issues of dollar-denominated czarist bonds in default: $25 million in five-year bearer bonds, paying 5 1/2 percent (in gold), due in 1921, and $50 million in three-year participation certificates, paying 6 1/2 percent, due in 1919. Principal and interest -- calculated at 6 percent annual simple interest -- minus certain credits boost the current value of each $1,000 bond to between $4,920 and $4,997, according to Sills' calculations.
Sills brought a class action against the U.S.S.R on behalf of bondholders, led by Carl Marks & Co., a New York dealer, which owns well over half of the bonds. The other bonds, to the extent that they have not been lost or destroyed, are held by private investors, mainly heirs of the original owners.
John R. Petty, chairman of Marine Midland Banks and also president of the Foreign Bondholders Protective Council, declared, "We have to explore the implications for current U.S. bondholders. It could be favorable, but we need more facts."
Observers point out that there exist substantial differences between the U.S. and British situations. Besides lacking a bank account of czarist money here, the U.S. government takes a more hands-off approach than the British Treasury. There are no known U.S.-Soviet negotiations going on now.