Will Russian Entities Service Foreign Debt?

President Vladimir Putin banned all Russian residents from transferring foreign currency abroad, hardening capital controls as part of a package of retaliatory measures for U.S. and European sanctions over his invasion of Ukraine.

The steps, which take effect March 1, include a ban on payments of hard currency made to foreigners “in connection with loan agreements,” according to the text of the decree published Monday.

The central bank later issued a clarification, saying the ban “only covers new loans and not servicing of existing debt.” Some investors and economists had said the phrasing could amount to a default.

The text of Putin’s decree “isn’t formulated clearly enough and could be interpreted in different ways,” Dmitry Polevoy of Locko-Invest wrote in a note.

Interfax quoted a source it didn’t name as saying the central bank had ordered depositories to temporarily suspend coupon and dividend payments to foreigners. That couldn’t immediately be confirmed.

Anton Tabakh, chief economist at Moscow-based credit assessor Expert RA, called the Kremlin’s new moves “capital controls of moderate harshness,” similar to those seen in the early 2000s in Russia.

According to the decree, from March 1, the following transactions will be among those banned:

• Foreign-exchange (FX) operations related to the provision by residents of foreign currency under loan agreements with nonresidents
• Crediting by residents of foreign currency to their deposit accounts opened with banks and other financial organizations located outside Russia, as well as making money transfers without opening a bank account using electronic means of payment provided by foreign payment service providers

The steps are part of a package of retaliatory measures for U.S. and European sanctions over Russia’s invasion of Ukraine. They also include restrictions on companies buying back their own stock, as well as some transfers to foreign accounts.

The U.S. and its allies have imposed sweeping sanctions on Russia’s biggest banks, including the central bank, and limits on billionaires and top officials including Putin himself for the invasion of Ukraine. The moves triggered a sharp drop in the ruble and forced the central bank to take emergency steps to stabilize the market.

See also:

• A Treasurer’s Checklist for Navigating the Russia-Ukraine Conflict
• Russia Erects Financial Defenses as Sanctions Hit Banks and Markets
• U.S. Pensions Face Demands to Exit Russian Assets
• A $9 Billion Bond Problem Is Coming for Russian Debtors

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