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76 Opinion
bne April 2021
Investors holding such notes do not bear a significant amount of currency risk, even in the event of such sanctions, given the liquidity of the three alternative currencies and the fact their valuation versus the US dollar is independent of the ruble and the status of Russo-Western relations more broadly.
However, when Moscow returned to foreign debt markets in March 2018 it sold $4bn in two series of dollar-denominated Eurobonds, tapping up a 30-year note it had issued the previous September for a further $2.5bn and raising the rest
“Investors holding such notes
do not bear a significant amount of currency risk, even in the event of such sanctions, given the liquidity of the three alternative currencies”
via a new $1.5bn bond due in 2029. The joint prospectus outlines a key difference in the ‘[alternative] payment currency event’ language that went little noticed at the time. Whereas the 2047 Eurobond contained the language quoted above, as with all other Russian sovereign Eurobonds issued in 2016 and 2017, the new notes featured a further modification.
Specifically, their ‘[alternative] payment currency event’ contained the language referenced above but also noted that "if for reasons beyond its control the Russian Federation is unable to make payments of principal or interest (in whole
or in part) in respect of the New Bonds in any of those currencies," that it may pay "in Russian rubles" at the exchange rate against the US Dollar set by the Russian Central Bank.
Although it has narrowed somewhat since 2018 as Russia's baseline interest rate has fallen from 7.5% in March 2018
to 4.5% as of the time of writing, the higher interest payments demanded by investors in Russia’s local currency government bonds (known as OFZs) make clear that any such move would precipitate a major haircut on investors looking to dump their Russian Eurobonds. If a spike in Russian interest rates were to follow such Western sanctions action, either due to the Western reaction to the sanctions or due to subsequent ruble debt issuance by Russian state- run companies, as occurred in 2014 after Rosneft – barred by the sectorial sanctions from borrowing in US dollars and therefore from Western financial institutions more broadly – sold the equivalent of nearly $11bn in ruble debts, the haircut Western Eurobond holders would face if they were repaid in rubles would be even greater.
While the Central Bank of Russia (CBR) has received regular plaudits for its management of Russia’s macroeconomic stability in the years since the 2014 sanctions and near- simultaneous oil price collapse, the Rosneft 2014 debt issuance highlights that it too is subject to the same political forces that dominate the rest of the Russian economy. When Rosneft issued the debt, the CBR simultaneously announced that the new bonds would be eligible for its 'Lombard list'
– in other words that the banks underwriting Rosneft's emergency debt raise would be able to use it as collateral for loans from the CBR, including foreign-currency denominated loans.
It cannot be ruled out that the CBR would once again be subject to significant political pressures in the event of such Western sanctions, further raising the risk that Western holders of Russian Eurobonds issued with the ‘alternative payment currency event’ triggers would be at risk of suffering Moscow’s response.
Western investors so far have been rather sanguine about the risk of such sovereign debt sanctions – there is no meaningful premium to the yield on the bonds containing the ruble ‘[alternative] currency payment event’ trigger versus those that do not.
Indeed, Russia sold a €750mn seven-year Eurobond in November 2020 at a yield of 1.125%, a record-low for Moscow, despite US banks being barred by the US Treasury from dealing in the primary market Russian government debt issuances in August of 2019 (NB: participation on the secondary market for Russian sovereign Eurobonds is not subject to these restrictions).
Leading voices in Russia have called for calm over the risk
of such sovereign debt sanctions as well, with Vladislav Inozemtsev recently writing that "a total ban on transactions involving the Russian foreign debt and the extension of that ban to the US allies will only result in serious losses for the Western financial institutions following the sell-out of this type of asset, and the Russian authorities will restructure their liabilities, making considerable savings on debt servicing”.
Whether he is correct on the Russian authorities’ ability to smoothly manage being frozen out of Western capital markets remains to be seen, but he is certainly correct that Western holders of Russia sovereign Eurobonds face a risk of incurring serious losses if the West does institute a sovereign debt ban.
Maximilian Hess is head of political risk at Hawthorn Advisors in London. He also serves as a fellow at the Foreign Policy Research Institute in Philadelphia, Pennsylvania. Follow him on twitter at @zakavkaza.
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