Russia’s local bonds drop as Moscow takes first steps towards reopening markets

Russia’s local currency bonds dropped on Monday as trading resumed for the first time since Vladimir Putin’s invasion of Ukraine, in the first tentative steps towards reopening Moscow’s financial markets.

Yields on the benchmark 10-year rouble bond, which rise as prices fall, climbed as high as 19.7 per cent in pre-market trading before settling back to 13.9 per cent — roughly 1.7 percentage point higher than the last trading day on February 24, according to Refinitiv data.

One investor said brokers were quoting higher yields of more than 15 per cent shortly after the market reopened, with large gaps between bid and offer prices. Foreigners remain effectively barred from the market given the difficulty in settling transactions, the investor said.

The main international securities depositories, Euroclear and Clearstream — which hold €50tn of assets on behalf of investors — stopped accepting payments in roubles in early March. That in effect trapped foreign investors in the local debt market, where they held bonds worth $41bn at the start of the year.

The Russian central bank announced the resumption of trading on Friday, and said it would purchase rouble bonds “in order to neutralise excessive volatility and provide balanced liquidity”. It also opened trading on the Moscow exchange of derivatives, precious metals, foreign exchange and money markets.

Russian assets tumbled along with the rouble after President Putin launched his incursion into Ukraine last month, but the country’s local financial markets have been largely closed since the US and Europe imposed unprecedented sanctions aimed at cutting Russia off from the global financial system.

The rouble also fell on Monday, trading 5 per cent lower at 104.5 to the dollar, according to Refinitiv data.

The Russian equity market remained closed on Monday. But over the weekend, the central bank also made its first steps to settling billions of dollars of equity trades for international investors, which had become trapped when Putin introduced capital controls at the end of February. The move banned Russian-based institutions from transferring foreign currency abroad. 

The central bank confirmed there would be a window to finalise outstanding deals in all currencies for “non-resident clients from unfriendly countries”.

It will allow deals done before February 28 — the day the stock market closed — to be settled and remain open until April 1. However, the funds will remain in Russia while the controls are in place.

Holdings of Russian equities by foreign investors at the end of 2021 amounted to $86bn, Moscow Exchange data show.

The latest declines for Russia’s local debt come after Moscow for the time being avoided a widely anticipated default on its foreign bonds last week by making a $117mn interest payment.

The Russian finance ministry had previously warned that western sanctions might prevent it from making dollar payments to international investors, claiming the curbs on Russia’s central bank were forcing the country into an “artificial default”. The ministry said a coupon payment on its local debt earlier this month would not reach foreign holders due to a central bank ban on exporting foreign currency.

Russia’s foreign currency bonds, which western investors are still able to trade, also lost ground on Monday. A dollar bond maturing in 2043, which last week climbed to around 50 cents on the dollar, was trading at 42 cents — though still well above the level of less than 20 cents earlier this month when investors were bracing for immediate default.

A further $66mn interest payment on Russia’s dollar debt is due on Monday. Like last week’s coupons, it needs to be made within a 30-day grace period to avert a default.

Sterner tests of Russia’s willingness and ability to continue servicing its foreign debt lie ahead, with a $2bn repayment due on April 4. An exemption in Washington’s sanctions that allows US investors to receive interest payments on Russian debt will also end on May 25.

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