Published by EH.Net (March 2017)

Kim Oosterlinck, Hope Springs Eternal: French Bondholders and the Repudiation of Russian Sovereign Debt. New Haven: Yale University Press, 2016. xiv + 244 pp. $85 (cloth), ISBN: 978-0-300-19091-5.

Reviewed for EH.Net by Amir Rezaee, ISG Business School; and David Le Bris, Toulouse Business School.

The current high levels of public debt in many countries, and the political and academic debates on how to reduce those levels, provide a meaningful motivation to read Kim Oosterlinck’s book on the radical solution adopted by Soviet Russia one century ago. In his book, Oosterlinck explores how Western countries in general, and France in particular, reacted to the Soviet Union’s decision in 1918 to not repay the nation’s debt, as well as financial market reactions to this emblematic and brutal repudiation. Relying on his twenty years of research experience in sovereign debt, Oosterlinck explores the consequences of the Soviet Union’s repudiation on bond markets, combining a conscientious historical investigation with meticulous financial analysis.

In the introduction Oosterlinck puts these events into perspective by comparing yield spreads at the time of the Soviet repudiation to the recent Greek default in October 2011. The analysis uncovers a paradox that drives the whole book. During the last Eurozone crisis, bond prices fell well before any announcement of default or debt restructuring. In contrast, the price of Russian bonds remained surprisingly high for years after the country announced it would not pay its debt. Two years after the repudiation, Russian sovereign bonds traded in Paris were still worth almost 50 percent of their face value. To understand this paradox, the author investigates three reasons why investors believed they would be reimbursed: the possibility that the Bolshevik regime would change its stance regarding this debt, an overthrow of the Bolshevik regime and finally the hope that other governments (including France) would bail out investors.

The book’s introduction also provides a general review of Russian debts at the time, focusing on the amounts of debt held in France but excluding securities issued by private companies. Chapter one presents an informative overview of academic literature on sovereign debt. To the Soviets, the Russian debt was an “odious” obligation. The Bolsheviks thought that the general population should not have to honor debt issued by the despotic Tsarist government.

Chapter two looks at efforts by Western governments to protect the interests of their citizens who held Russian bonds. It illustrates how a variety of factors influencing the relationship between Russia and lender governments made a general repayment agreement impossible to reach. The author also shows that a cocktail of corrupt press and underwriters, falsified accounts and geopolitical forces combined to create a “gilt-edge” reputation for Russian bonds. But the impact of this fake reputation on investment behavior is difficult to distinguish from the other reasons motivating such a massive capital export to Russia. Among them the major factors are the mechanical effect of a positive trade balance for France, the geopolitical argument for a military alliance, and above all the financial interests of savers who invested in this promising empire.

Chapter three depicts the military campaigns of the time that could have put pressure on the Soviets to honor the debt or could have helped the White armies to overthrow the Bolsheviks. In this chapter, a map of the Russian Empire at the time would help readers understand the military maneuvers. This chapter clearly presents the damages caused by the invasion of Russia by the Allies, which the Bolsheviks later used as argument against repaying the debt.

Chapters four and five focus on another reason which made investors believe they would be repaid: the possibility that third-party countries would reimburse the debt. The newly created states originating from the Russian Empire, such as Poland, Finland and Ukraine, could have recognized part of the outstanding debt. More surprising, though, is that the greatest source of hope was the idea of a bailout by the French government. This hope was based partially on precedent: France, as the main support of the Mexican government, had partially reimbursed the debt issued by its protégé after that country defaulted in 1868.

In chapter six, a summary of three previously-published quantitative articles, the author examines the relative importance of the factors contributing to the resilience of Russian bond prices. Oosterlinck limits the use of econometric analysis, however, to avoid burdening the text. The results are quite interesting: Russian bond prices were mainly reacting to news about the civil war and French investors largely expected their government to provide a bailout of Russian bond holders. The book’s epilogue points out that Russia finally “respected” the rules of the game, offering to reimburse part of the debt repudiated by the Bolsheviks when the country decided to reissue bonds in the 1990s.

To conclude, this book is a must-read on the crucial issue of sovereign debt repudiation. It looks at the Russian example from a variety of angles and reveals important results. We now have a clear understanding of the impact of the Soviet repudiation. However, as in the case of the recent Greek default, one could then ask why so much capital was invested in the country.

One point should not be lost on policymakers. The complex path followed by the Soviets to resolve the debt issue, so well analyzed in this book, should not overshadow another solution of that time — inflation.  In 1921, without any official default or write-off, inflation alone had reduced the real value of the French public debt by 70 percent.

Amir Rezaee (Associate Professor of Finance at ISG Business School) explored the Paris corporate bond market in the nineteenth century in his doctoral thesis. He and David Le Bris (Associate Professor of Finance at the Toulouse Business School) have written on the attractiveness of Russian sovereign bonds in the nineteenth century, through the lens of modern finance, in “How Much Are International Capital Flows Influenced by Diplomacy? Evidence from the Natural Experience of Russian Debt.”

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