Foreign investors in Russian bonds face an unpleasant reality: they will not be paid as part of Moscow’s retaliation for Western sanctions.
The Bank of Russia said this week as part of a series of actions that it would block payments by depositories and registrars to foreign customers, including on the country’s local currency sovereign bonds. The move comes as the central bank and the Russian president have imposed capital controls to prevent foreign currencies from leaving the country in recent days.
“It’s effectively a default if they can’t or won’t transmit payment,” said Edward Al-Hussainy, principal analyst at Columbia Threadneedle Investments.
Investors who hold ruble-denominated government bonds were unable to sell them this week after the central bank shut down stock and bond markets to prevent a sell-off in Russian securities. Russia’s central bank temporarily banned brokers from selling securities on behalf of foreign clients earlier this week.
“The only thing aliens can do is hunker down and wait. It’s a business risk to invest in emerging markets,” said Paul McNamara, bond fund manager at GAM Investments. His fund holds some of these bonds.
Bond issuers have the right to decide on payments and can make transfers to the accounting system, the central bank said in a statement. But depositories and registrars, which are part of the financial infrastructure, are not allowed to transfer them to foreign customers, he said.
The Russian government was due to make a coupon payment on a local currency bond maturing on February 28, 2024 on Wednesday. Recent holders of this bond include funds managed by Vanguard Group Inc., State Street Global Advisors and JPMorgan Chase & Co, according to Factset data from late January.
Spokespersons for Vanguard and State Street Global Advisors did not immediately respond to requests for comment. JPMorgan declined to comment.
Non-residents of Russia held 19% of ruble-denominated sovereign debt known as OFZ valued at nearly 3 trillion rubles at the end of January, according to the Institute of International Finance. At Wednesday’s exchange rate, that’s about $26 billion.
Although the share of government bonds held by foreigners has decreased, the role of foreign banks in the Russian government bond market is considerable.
Foreign banks have become bigger traders of Russian local-currency bonds following the 2014 sanctions over Russia’s annexation of Crimea, now accounting for a larger share of such trade than domestic banks, according to the report. ‘IIR.
Banks use government bonds to manage their liquidity needs, using them to store additional cash or as collateral to secure additional cash. In other parts of the world, institutions often lend to each other for this purpose, but the interbank lending market is more limited in Russia.
The IIF said many foreign banks could not continue to operate in Russia without access to bonds and the central bank for liquidity.