Concerns grow over Russian default despite ruble coupon payment

Russia paid a bond coupon in rubles on Wednesday, but it is unclear how foreigners will be able to access the cash after the central bank banned transfers to foreign investors.

Investors are still struggling to understand whether or not the bonds are in default, even after the widely expected 11 billion ruble ($98 million) payment. The Bank of Russia introduced capital controls in a bid to prevent the collapse of the ruble after international governments froze their foreign exchange reserves in response to Russia’s invasion of Ukraine.

The restrictions could make foreign investors, who held almost 3 trillion rubles ($29 billion) in so-called OFZ debt as of early February, unable to collect proceeds on their holdings, raising the specter of a first default. payment of the nation’s debt since 1998. The transfer of the coupon was reported Wednesday afternoon on the website of the National Settlement Depository.

“Unless it reaches all the holders, they cannot deny that it is a 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 imposed on Monday, the central bank separately told brokers that there would be a temporary ban on transfers of payments abroad. The regulator later confirmed the decision in an emailed comment to Bloomberg. On Monday, the Interfax news service reported that the suspension will be in place for half a year unless the regulator lifts it early.

The decision underscores how quickly Russia’s free-market credentials have disintegrated since the invasion of Ukraine.

Although the Russian National Settlement Depository has not blocked the accounts of the world’s largest settlement systems, Euroclear and Clearstream, it is limiting the ability to make payments of securities of Russian issuers to foreign individuals and legal entities in accordance with the request of the central bank, reported the Moscow Stock Exchange by email.

Separately, the central bank said trading in shares would remain closed on Wednesday, for the third day in a row.

Last week, OFZ yields soared nearly 2.5 percentage points as Russian 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 Russian government ruble debt has not yet been reopened.

With up to half of its foreign exchange reserves frozen abroad by sanctions aimed at punishing the Kremlin for invading Ukraine, the Bank of Russia said on Monday it would tighten capital controls by banning the transfer of currency abroad.

Although he initially clarified that the measure was not intended to stop debt service, some investors and economists said that the wording of the decree could amount to a default.