Russian Default Angst Lingers

Russia paid a coupon due on ruble bonds on Wednesday, but it’s not clear how foreigners will be able to access the cash after the central bank banned transfers to foreign investors.

Investors are still scrambling to understand whether or not the bonds could be in default, even after the 11 billion ruble (US$98 million) payment that was widely expected. The Bank of Russia has introduced capital controls in a bid to avert a ruble collapse after its foreign reserves were frozen by international governments in response to Russia’s invasion of Ukraine.

The restrictions could leave foreign investors, who held almost 3 trillion rubles ($29 billion) in the so-called OFZ debt at the start of February, unable to collect income on their holdings—which would raise the specter of the nation’s first debt default since 1998. The transfer of the coupon was reported Wednesday afternoon on the website of the National Settlement Depository.

“Unless it reaches all holders, they can’t deny default,” Paul McNamara, a portfolio manager at GAM Investments, said of the coupon on Wednesday. “They can’t say they paid with any conviction.”

In addition to a broader presidential decree on capital controls on Monday, the central bank communicated separately to brokers that there would be a temporary ban on the transfer of payments abroad. The regulator subsequently confirmed the decision in an emailed comment to Bloomberg. On Monday, the Interfax news service reported the suspension will be in effect for half a year unless the regulator lifts it ahead of time.

“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 on Tuesday. “However, the payments themselves will not be made by depositories and registrars to foreign clients. This also applies to OFZ.”

The decision has underscored how rapidly Russia’s free-market credentials have disintegrated since the Ukraine invasion.

The world’s biggest settlement systems, Euroclear and Clearstream, 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 percent, as of February 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 central bank said stock trading would be closed for a third day on Wednesday.

Last week, OFZ yields soared almost 2.5 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.

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 it initially 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.

“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 percent. The ruble’s drop of more than 20 percent 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, raises the probability of more severe credit outcomes for foreign holders of Russian debt securities,” Moody’s Investors Service said in an statement.

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