Russia’s central bank has banned coupon payments to foreign holders of ruble bonds, known as OFZ, in what it calls a temporary step to strengthen its markets after international sanctions.
The Central Bank of Russia has issued instructions as part of a series of measures announced this week, which includes freezing sales of local shares by foreigners. It could render foreign investors with nearly 3 trillion rubles ($29 billion) of debt at the beginning of February unable to collect income from bonds that are already barred from sale by restrictions.
The central bank did not specify how long the ban would last. On Monday, the Interfax news service reported that the temporary suspension would be in effect for half a year unless lifted in advance by the regulator.
In an emailed response to questions, the central bank said, “Issuers have the right to decide on the payment of dividends and other payments on securities and transfer them to the accounting system. However, payments will not be made to foreign customers by depositors and registrars. This also applies to OFZ,” he said.
The resolution is a reflection of how quickly Russia’s free-market character has been disintegrating since the invasion of Ukraine.
The world’s largest clearing systems Euroclear and Clearsteam no longer trade Russian assets, reversing the very heralded opening of the domestic debt market to international investors nine years ago.
OFZ yields rose almost two and a half percentage points last week as President Vladimir Putin recognized two separatist regions in eastern Ukraine and subsequently launched a military offensive against the rest of the country. Trade in the ruble debt of the Russian government has not yet reopened.
Foreign investors no longer had to go through local brokerages to exchange Russian ruble bonds, helping to lower the country’s borrowing costs, pushing the share of foreign investors even higher to 19%.
The central bank said the decision was taken to “avoid the mass sale of Russian securities, prevent the outflow of funds from the Russian financial market and support financial stability.”
Half of the bank’s foreign currency reserves have been frozen abroad by sanctions aimed at punishing the Kremlin for invading Ukraine, while Russia’s Central Bank announced on Monday it will tighten capital controls with a ban on foreign currency transfers abroad. While it was initially made clear that this step was not intended to halt the service of the debt, some investors and economists said the decision could lead to default.
“This will most likely be a technical default, we’ll see how long it lasts,” said Nick Eisinger, co-head of emerging markets active fixed income at Vanguard Asset Management in London. “We also see a strong probability of technical default in Eurobonds.”
Russian ruble bonds pushed the yield on the 10-year benchmark bond up 240 basis points to 12.28% last week. Prices compiled by Bloomberg are the worst drop globally, with the ruble falling more than 20% so far this year.
“Potentially weaker willingness by the Russian government to fail to pay its debt in full and on time raises the possibility of more serious credit consequences for foreign holders of Russian debt securities,” Moody’s Investors Service said in a statement.