Russia has offered to buy back dollar bonds maturing next week in rubles in a move seen by analysts as helping local holders of the $2-billion sovereign issue receive payment, while also easing the country’s hard-currency repayment burden.
The finance ministry offer on Eurobonds maturing on April 4, Russia’s biggest debt payment this year, follows Western moves to tighten sanctions against the country over its invasion of Ukraine and to freeze Moscow out of international finance.
Moscow, which calls its actions in Ukraine a “special military operation,” says Western measures amount to “economic war.” In response, it has introduced countermeasures and has demanded foreign firms pay for Russian gas in rubles rather than dollars or euros.
The bonds – issued in 2012 – would be bought at a price equivalent to 100 per cent of their nominal value, the ministry said its statement. Buying back bonds will reduce the overall size of the outstanding bond when it matures on April 4.
However, it was not immediately clear if the amount the government would buy back was limited or what would happen to holdings of creditors that would not tender their bonds.
The terms of the bond prescribe that repayment has to occur in dollars. Repaying at maturity in rubles might again raise the prospect of Russia’s first external sovereign default in a century.
Analysts and investors said the move was likely designed to help Russian holders who now face restrictions in receiving dollar payments.
“This is a tender offer and not a final decision that these bonds will be paid in rubles. Perhaps, Russian authorities want to gauge investors’ willingness to accept payment in rubles?” said Seaport Global credit analyst Himanshu Porwal.
Tim Ash of BlueBay Asset Management, which is not a bondholder, said the move was part of a fight back by Russia’s central bank and finance ministry “to fend off default and stabilize markets and the ruble.”
Ash said the United States’ Office of Foreign Assets Control (OFAC), which enforces US sanctions, “should make clear” it will not extend a deadline of May 25 for US individuals or entities to receive payments on Russian sovereign bonds.
Russia’s finance ministry said in its statement on Tuesday that bondholders should submit requests to sell their holdings to the National Settlement Depository between 1300 GMT on March 29 and 1400 GMT on March 30.
A fund manager said the ministry’s offer might be designed to help Russian investors secure payment because Euroclear, an international settlement system, had been blocking dollar payments to the Russian clearing system.
“Everybody wants dollars right now – in and outside Russia – so I would assume that only local holders and local banks that have issues with sanctions will make use of this operation,” said Kaan Nazli, portfolio manager at Neuberger Berman, which recently reduced its exposure to Russian sovereign debt.
Nazli, who said he had not previously seen a buyback that switched the repayment currency, added that foreign investors were unlikely to be interested given the ruble “is no longer a convertible currency.”
The ruble initially crumbled after the West imposed sanctions, plunging as much as 40 per cent in value against the dollar since the start of 2022. It has since recovered and was trading down about 10 per cent in Moscow on Tuesday.
The finance ministry did not provide a breakdown of foreign and Russian holders of the Eurobond-2022. It did not respond to a request about how much of the outstanding $2-billion it wanted to buy back or what would happen if investors refused the offer.
The bond has a 30-day grace period and no provisions for payments in alternative currencies, JPMorgan said.
According to Refinitiv database eMAXX, which analyzes public filings, major asset managers such as Brandywine, Axa, Morgan Stanley Investment Management, BlackRock were recently among the holders of the bond coming due on April 4.
The finance ministry had said earlier on Tuesday it had fully paid a $102-million coupon on Russia’s Eurobond due in 2035, its third payout since Western sanctions called into question Moscow’s ability to service its foreign currency debt.
Russian sovereign debt repayments have so far gone through, staving off a default, although sanctions have frozen a chunk of Moscow’s huge foreign reserves. Russian officials have said any problem with payment that led to a formal declaration of default would be an artificial default.
Russia’s next payment is on March 31 when a $447-million payment falls due. On April 4, it also should pay $84-million in coupon a 2042 sovereign dollar bond.
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