Russia’s Bond Buyback in Rubles Aims at Ensuring Locals Get Paid

(Bloomberg) -- Russia has offered to buy back dollar debt maturing next week and pay in rubles -- a tactic aimed at reducing the hurdles for local holders to receive funds, while also curbing the overall amount of foreign currency the government has to pay out.  

The Finance Ministry is collecting bids from 4 p.m. in Moscow on March 29 to 5 p.m. on March 30, according to a statement. It offered to repurchase the bonds, which mature on April 4, at 100% of par value using the official central bank ruble rate on March 31, it said. The statement didn't indicate how much of the $2 billion eurobond it could repurchase.

“This offer targets local holders,” said Sofya Donets, economist at Renaissance Capital in Moscow. “For them this is an opportunity to get the payment with less risk of it getting stuck over the sanctions.” 

Despite warnings from credit-rating agencies, the government has so far sidestepped a default and continues to service its foreign bonds after sanctions over the invasion of Ukraine severed Russia from the global financial system. Capital controls and restrictions imposed by the world's biggest settlement systems have complicated and delayed the arrival of funds on previous payments for foreign and local investors alike.  

“For the Finance Ministry, this reduces potential amount of foreign currency payments, which is also desirable for them,” Donets said. “The absolute majority of the local holders will use this option. No one is talking about a full shift to paying in rubles for all Russia eurobonds.” 

Earlier on Tuesday, the Finance Ministry said it had made a $102 million coupon payment on a dollar bond maturing in 2035. 

The buyback offer comes after the ministry filed notifications on Monday for an “interest payment” and “principal repayment” on the $2 billion of dollar-denominated debt due on April 4. It also filed a notification for a coupon on bonds due in April 2042. 

The Treasury Department issued a general license on March 2 that allows U.S. persons to receive bond payments from the central bank of Russia through May 25, further draining the country's resources as it prosecutes a war in Ukraine, according to a Treasury spokesperson. Questions about where exactly the funds were being drawn were referred to the central bank of Russia.

Foreign bondholders of Russian steelmaker Novolipetsk Steel received coupon payments due March 21 on time, while local noteholders didn't receive them, the company said in a statement a week ago. Two days later, an overdue interest payment on a sovereign Eurobond began to show up in some overseas investors' accounts. 

“The government wants to remove the risk of default due to technical payment issues,” said Cristian Maggio, head of portfolio strategy at Toronto Dominion Bank in London. 

Despite the uncertainties, the ruble has strengthened in 13 of the past 14 trading sessions in Moscow, paring most of the 33% decline that it incurred in onshore trading from late February through early March. The rebound is a result of central bank policies, such as capital controls, that enforce buying and limit selling the ruble, said Natalie Rivett, senior emerging-market analyst at Informa Global Markets Ltd. 

Ruble Edges Closer to Clawing Back All Its Post-Invasion Decline 

The currency's rally could prove short-lived, as the spot market is a fraction of what it used to be and the ruble remains the second-worst currency in the world this year out of 130 tracked by Bloomberg. The offer won't appeal to overseas investors blocked from converting rubles into foreign currencies, said TD's Maggio. 

“When they receive rubles, then what do they do with them?”  

G-7 Rejects Putin Demand for Ruble Payments for Russian Gas

©2022 Bloomberg L.P.

With assistance from Bloomberg