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Putin’s ruble work-around still leaves bond payments in doubt

March 6, 2022, 9:19 PM UTC

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. 

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.

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.

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.

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

IssuerMaturityFace Value ($m equivalent)
Rosneft Oil Co Via Rosneft International Finance DACMarch 62000
Gazprom PJSC Via Gaz Capital SAMarch 71300
Polyus Finance PLCMarch 28482.8
Russian GovernmentApril 42000
Russian Railways Via RZD Capital PLCApril 5624.6
Borets Finance DACApril 7155.6
MMC Norilsk Nickel OJSC Via MMC Finance DACApril 8500
ABH Ukraine Ltd Via EMIS Finance BVMay 650

Upcoming corporate coupon payments

IssuerMaturityCoupon DateApprox Coupon Amount ($m equivalent)
Russian Railways Via RZD Capital PLC3/6/20233/6/202223
Rosneft Oil Co Via Rosneft International Finance DAC3/6/20223/6/202242
Gazprom PJSC Via Gaz Capital SA3/6/20233/6/202210.9
Gazprom PJSC Via Gaz Capital SA3/7/20223/7/202242.3
Gtlk Europe Capital DAC3/10/20273/10/202214
MMC Norilsk Nickel OJSC Via MMC Finance DAC9/11/20253/11/20226.38
Russian Railways Via RZD Capital PLC3/12/20263/12/20222.1
Eurochem Finance DAC3/13/20243/13/202219.3

Upcoming sovereign coupon payments

IssuerMaturityCoupon DateApprox Coupon Amount ($m equivalent)
Russian Government 9/16/20433/16/202244.1
 9/16/20233/16/202273.1
 3/21/20293/21/202265.6
 3/28/20353/28/2022102
 3/31/20303/31/202287.5
 4/4/20424/4/202284.4
 4/4/20224/4/202245
 5/27/20265/27/202271.3
 5/27/20365/27/202232.3

With assistance from Laura Benitez, Richard Bravo, Ben Sills and Paul Abelsky.

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