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Rublization of Russia’s external debt 06/23/2022

Conclusion: The new decree of the President of Russia dated June 22, 2022 on the temporary procedure for fulfilling the country’s external obligations in foreign currency to residents and non-residents marks the beginning of the first “rubleization” of foreign currency obligations in Russian history and, thereby, the subsequent deoffshorization of the Russian financial system. We believe that this measure reduces the uncertainty of holding prospects for Eurobonds purchased primarily through Euroclear, and should lead to a significant reduction in the two-fold premium formed on papers in NSD compared to papers in Euroclear, especially if their holders are residents of a “friendly” jurisdiction. It is likely that a similar principle, as we assumed earlier, will be used when repaying all external debt obligations of Russian companies and banks. At the same time, there is a risk of technical default on obligations in foreign currency and the risk of formal default, but in the latter case, we believe that there will not be enough votes of holders from “unfriendly” countries that have not received payments (they should be at least 25%) to announce it.

What happened?

On the eve of the date of payment of the next coupon on sovereign Eurobonds (payments on issues Russia 27 and Russia 47 fall on June 23), the President of Russia signed a decree “On the temporary procedure for the execution of government debt obligations to residents and foreign creditors, denominated in government securities, the nominal value of which is indicated in foreign currency. The content of the document fully complies with the government’s previously announced plans, namely, payments on sovereign debt will be made in rubles at the exchange rate to accounts with NSD.

What does this mean for holders of Russia’s external debt?

Local investors will receive money in their depositary accounts. Currently, holders of external bonds do not receive funds in rubles through NSD, but they will receive them under the new scheme.

Holders whose rights are recorded in foreign organizations (Euroclear) have the right to send an application to NSD for opening an “I” type account, to which Russian rubles will also be credited. The operating mode of the “I” account will be set by the Bank of Russia.

In contrast to the “C” type account (for repayments on the debts of corporate borrowers), the funds received can be used without restrictions. They are offered to be credited to a bank that is not under sanctions, and then converted into the desired currency – the transfer of such funds abroad is carried out without restrictions (for other operations, there is a limit of $150,000 per month). Vladimir Putin also instructed to identify banks for payments under this scheme within 10 days.

Payments on external sovereign bonds of Russia

Source: ITI Capital

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