Russia Bans Coupon Payment to Foreigners on $29 Billion in Bonds

(Bloomberg) -- The Russian central bank has banned coupon payments to foreign owners of ruble bonds known as OFZs in what it called a temporary step to shore up markets in the wake of international sanctions.

The Bank of Russia issued the instruction to depositaries and registries as part of a raft of measures announced this week that included a freeze on local security sales by foreigners. It could leave foreign investors who held almost 3 trillion rubles ($29 billion) in the debt at the start of February unable to collect income on their holdings, which are already blocked from sale by restrictions.

The next coupon payment on OFZ bonds is due tomorrow on notes maturing in 2024, according to data compiled by Bloomberg.

“Game over? I think they underestimated how far sanctions will go and now don't have much left to do,” said Viktor Szabo, a fund manager at Aberdeen Asset Management in London. “All Russian markets have fallen apart.”

The central bank didn't specify how long the ban will last. On Monday, the Interfax news service reported the temporary suspension will be in effect for half a year unless the regulator lifts it ahead of time. The decision underscored how rapidly Russia's free-market credentials have disintegrated since the Ukraine invasion.

Cut Off

“Issuers have the right to make decisions on the payment of dividends and the making of other payments on securities and transfer them to the accounting system,” the central bank said in an emailed reply to questions. “However, the payments themselves will not be made by depositories and registrars to foreign clients. This also applies to OFZ.”

The world's biggest settlement systems Euroclear and Clearsteam are no longer handling Russian assets -- reversing the much-heralded opening of the local debt market to international investors nine years ago.

The fact that foreign investors no longer needed to go through local brokerages to trade Russian ruble bonds helped drive down the nation's borrowing costs and pushed the share of foreign investors higher. Their proportion reached 19.1% as of Feb. 1.

While Russia's National Settlement Depository hasn't blocked the accounts of Euroclear and Clearstream, it's limiting the ability to make payments on securities from Russian issuers to foreign individuals and legal entities in line with the central bank's request, the Moscow Exchange said by email. Separately, the cental bank said stocks trading would be closed for a third day on Wednesday.

Last week, OFZ yields soared almost two and half percentage points as President Vladimir Putin first recognized two breakaway regions in eastern Ukraine and then launched a military attack on the rest of the country.

Even before the invasion, Russia had halted local bond auctions as geopolitical tensions mounted. Trading in the Russian government's ruble debt has yet to reopen.

The decision by the central bank was taken to “avoid mass sales of Russian securities, the withdrawal of funds from the Russian financial market and to support financial stability,” it said.

With as much as half of its foreign reserves frozen abroad by sanctions aimed at punishing the Kremlin for invading Ukraine, the Bank of Russia said Monday it would harden capital controls with a ban on transferring foreign currency abroad. While initially it clarified that the step wasn't aimed at stopping the servicing of debt, some investors and economists said the phrasing of the decree could amount to a default.

“I haven't seen this before,” said Paul McNamara, a portfolio manager at GAM Investments. “It really doesn't bode well for investors holding FX-denominated bonds.”

‘Technical Default'

“This will likely be a technical default, we'll see how long it goes on for,” said Nick Eisinger, co-head of emerging-markets active fixed income at Vanguard Asset Management in London. “We also see strong likelihood of technical default on Eurobonds at the sovereign level.”

Sovereign ruble bonds collapsed last week, sending the yield on the 10-year benchmark up 240 basis points to 12.28%. The ruble's drop of more than 20% so far this year is the worst slump globally, prices compiled by Bloomberg show.

“A potentially weaker willingness on the part of the Russian government to service its debt on time and in full, raise the probability of more severe credit outcomes for foreign holders of Russian debt securities,” Moody's Investors Service said in an statement.

Explainer: How Sanctions Create a Risky Tangle for Russian Bonds

With assistance from Bloomberg