Business Maverick

Business Maverick

Putin’s Ruble Workaround Still Leaves Bond Payments in Doubt

Vladimir Putin on March 2, 2022. Photographer: AFP/Getty Images

Russia and Russian companies will be allowed to pay foreign creditors in rubles, according to a decree signed by President Vladimir Putin on Saturday, as a way to service debt while capital controls remain in place. 

The decree establishes temporary rules for sovereign and corporate debtors to make payments to creditors from “countries that engage in hostile activities” against Russia, its companies and citizens. The government specified on Saturday that it will prepare a list of such countries within two days.

Russian corporate bonds denominated in foreign currencies have plunged to deeply distressed levels in recent days as investors weighed the impact of sanctions imposed on the country in the wake of its invasion of Ukraine. The Russian government responded to the penalties by dramatically reducing access to foreign currencies, which could restrict the ability of bondholders to receive interest and principal payments.

Separately, clearing houses Clearstream and Euroclear stopped accepting the ruble as settlement currency and have excluded all securities issued by Russian entities from all Triparty transactions, barring a traditional channel used to make payments to bondholders.

Russian Banks
Russia’s central bank said it will temporarily ease reporting requirements for Russian lenders in an effort to shield them from the pressure of sanctions. Commercial banks will no longer have to publish their monthly accounts on their websites, though they will still have to submit them to the central bank and then can disclose them to counterparties.

Read More: Russia Says Sanctions Determine If Foreign Bondholders Get Paid

According to Saturday’s decree on servicing foreign-held debt, payments will be considered executed if they are carried out in rubles at the central bank’s official rate.

Debtors can ask a Russian bank to create a special “C” ruble-denominated account in the name of foreign creditors for settlement, while local creditors will be paid through Russian depositories. The rule applies to amounts in excess of 10 million rubles ($81,358) per month or exceeding the equivalent amount in foreign currency.

Russia’s Central Bank said on Sunday that foreign creditors from countries that have not imposed sanctions may be able to receive the payment in the currency in which the debt is denominated if the Russian debtor gets a special permission to do so.

Russia’s long-term issuer and senior unsecured debt ratings were cut further into junk territory by Moody’s Investors Service on Sunday. The rating assessor cited expectations that capital controls by the central bank will restrict cross border payments including for debt service on government bonds.

CDS Hurdle

On March 2, Russia made payment on a 11.2 billion-ruble coupon for 339 billion rubles of sovereign bonds known as OFZs due February 2024. While Russia’s National Settlement Depository received the money, foreign bondholders weren’t paid because of the central bank’s order barring foreign payments. That triggered a debate over whether or not that constituted a default.

Some of Russia’s foreign sovereign bonds do allow payments in rubles. That’s a potential problem for holders of credit-default swaps, which are derivatives that insure against defaults. JPMorgan Chase & Co. strategists led by Trang Nguyen say that the optionality to pay in rubles “may render these bonds out of scope for CDS as ‘obligations’ and ‘deliverable obligations,’” because the ruble is the domestic currency of the issuer, and it just so happens to not be a hard currency, such as the dollar or euro.

“This means that bonds with ruble fallback provisions can neither trigger CDS nor be delivered into CDS,” Nguyen said in emailed comments on Sunday.

Russia has $117 million worth of coupons on dollar bonds coming due on March 16 that don’t have the option to be paid in rubles, the JPMorgan strategists said. If Russia decides to pay in rubles following Putin’s decree, “that would be an event of default and would trigger CDS,” Nguyen said.

The CDS cover a gross $41 billion of Russian debt, according to the Depository Trust & Clearing Corp.

Read More: Bondholders Say Russia’s Yandex Has Paid Coupon on Dollar Debt

Companies with upcoming maturities of dollar-denominated notes include state oil producer Rosneft PJSC, whose $2 billion bond matures on Sunday, and state-controlled energy giant Gazprom PJSC, which has a $1.3 billion note due on Monday. The latter was already in the process of settling that payment, Bloomberg reported earlier.

Here’s a selection of issuers scheduled to pay dollar-denominated notes in the coming months:

Upcoming Maturities

Issuer Maturity Face Value ($m equivalent)
Rosneft Oil Co Via Rosneft International Finance DAC March 6 2000
Gazprom PJSC Via Gaz Capital SA March 7 1300
Polyus Finance PLC March 28 482.8
Russian Government April 4 2000
Russian Railways Via RZD Capital PLC April 5 624.6
Borets Finance DAC April 7 155.6
MMC Norilsk Nickel OJSC Via MMC Finance DAC April 8 500
ABH Ukraine Ltd Via EMIS Finance BV May 6 50

Upcoming Corporate Coupon Payments

Issuer Maturity Coupon Date Approx Coupon Amount ($m equivalent)
Russian Railways Via RZD Capital PLC 3/6/2023 3/6/2022 23
Rosneft Oil Co Via Rosneft International Finance DAC 3/6/2022 3/6/2022 42
Gazprom PJSC Via Gaz Capital SA 3/6/2023 3/6/2022 10.9
Gazprom PJSC Via Gaz Capital SA 3/7/2022 3/7/2022 42.3
Gtlk Europe Capital DAC 3/10/2027 3/10/2022 14
MMC Norilsk Nickel OJSC Via MMC Finance DAC 9/11/2025 3/11/2022 6.38
Russian Railways Via RZD Capital PLC 3/12/2026 3/12/2022 2.1
Eurochem Finance DAC 3/13/2024 3/13/2022 19.3

Upcoming Sovereign Coupon Payments

Issuer Maturity Coupon Date Approx Coupon Amount ($m equivalent)
Russian Government 9/16/2043 3/16/2022 44.1
9/16/2023 3/16/2022 73.1
3/21/2029 3/21/2022 65.6
3/28/2035 3/28/2022 102
3/31/2030 3/31/2022 87.5
4/4/2042 4/4/2022 84.4
4/4/2022 4/4/2022 45
5/27/2026 5/27/2022 71.3
5/27/2036 5/27/2022 32.3

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