Russia intensifies its economic retaliation by offering to buy back Eurobonds for the ruble

An image shows Russian ruble coins in this illustration taken on October 26, 2018. The photo was taken on October 26, 2018. REUTERS/Maxim Shemetov

LONDON (Reuters) – Russia responded on Tuesday to what it called an “economic war” with the West by offering to buy back its $2 billion in international bonds due next month in rubles instead of dollars.

The Finance Ministry’s offer of an international bond maturing on April 4, Russia’s largest debt payment this year, followed Western moves to tighten sanctions on the country over its invasion of Ukraine and Moscow’s freezing of international funding.

Moscow, which describes its actions in Ukraine as a “special military operation”, says the Western actions amount to “economic war”. In response, it has already asked foreign companies to pay for Russian gas in rubles rather than dollars or euros. Read more

It was not immediately clear whether bondholders would be forced to accept the ruble if they declined the offer, a move that would break the terms of the bond and would once again raise the possibility of Russia’s first default on external sovereignty in a century.

Creditors said his goal may be to help Russian holders who now face restrictions in receiving dollar payments.

“This is a tender offer and not a final decision that these bonds will be paid in rubles. Perhaps the Russian authorities want to gauge the willingness of investors to accept payment in rubles?” said Seaport Global credit analyst Himanshu Purwal.

Tim Ash of BlueBay Asset Management, who is not a bondholder, said the move was part of a battle by Russia’s central bank and finance ministry “to stave off defaults and stabilize markets and the ruble”.

Ash said the US Office of Foreign Assets Control (OFAC), which imposes US sanctions, “should make it clear” that it will not extend the May 25 deadline for US individuals or entities to receive payments on Russian sovereign bonds.

Russia’s Finance Ministry said in its statement on Tuesday that bondholders should submit applications to sell their holdings to the National Settlement Deposit between 1300 GMT on March 29 and 1400 GMT on March 30.

Safe Payment

It added that the Eurobonds would be purchased at a price equal to 100% of their face value.

A fund manager said the ministry’s offer may be designed to help Russian investors secure payment because Euroclear, an international settlement system, was blocking payments in dollars to Russia’s clearing system.

said Kan Nazli, portfolio manager at Neuberger Berman, which recently reduced exposure to Russian sovereign debt.

Nazli, who said he had never seen a buyback that changed the payment currency, added that foreign investors were unlikely to be interested given that the ruble was “no longer a convertible currency.”

The ruble initially collapsed after being sanctioned by the West, and has fallen as much as 40% in value against the dollar since the start of 2022. The ruble has since recovered and was trading around 10% lower in Moscow on Tuesday.

The Finance Ministry did not provide details of foreign and Russian Eurobond holders for 2022. It did not respond to a request about how much $2 billion owed it wanted to buy back or what would happen if investors rejected the offer.

JP Morgan said the bonds have a grace period of 30 days and there are no provisions for payments in alternative currencies.

According to the Refinitiv eMAXX database, which analyzes public filings, major asset managers such as Brandywine, Axa, Morgan Stanley Investment Management and BlackRock were recently among the holders of bonds maturing on April 4.

The Finance Ministry said earlier on Tuesday it had paid in full a $102 million coupon for Russian euro bonds due in 2035, the third payment since Western sanctions that have raised questions about Moscow’s ability to service its foreign currency debt.

Repayments of Russian sovereign debt have passed so far, to avoid default, although sanctions have frozen a significant part of Moscow’s huge foreign reserves. Russian officials have said that any payment issue that leads to an official declaration of default would be an artificial default.

Russia’s next payment will be on March 31, when the $447 million payment is due. On April 4, it also has to pay $84 million in a $2,042 coupon for a sovereign dollar bond. Read more

Reporting by Reuters. Written by Edmund Blair. Editing by Alexander Smith and Carmel Kremens

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