Russia’s local bonds fall as Moscow takes first steps to reopen markets

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

Yields on the benchmark 10-year ruble bond, which rise as prices fall, rose as much as 19.7 percent in premarket trading before leveling off again at 13.9 percent — about 1.7 percentage points higher than last Trading day on February 24th. according to Refinitiv.

One investor said brokers noted higher yields of more than 15 percent soon after the market reopened, with large gaps between bid and ask prices. Foreigners are effectively left out of the market given the difficulties in completing transactions, the investor said.

Major international securities custodians Euroclear and Clearstream, which hold €50 trillion in assets on behalf of investors, stopped accepting payments in rubles in early March. This trapped foreign investors in the local bond market, where they held $41 billion worth of bonds earlier in the year.

The Central Bank of Russia announced the resumption of trading on Friday and said it would buy ruble bonds “to neutralize excessive volatility and balance liquidity.” It also opened trading on the Moscow Exchange for derivatives, precious metals, foreign exchange and money markets.

Russian assets tumbled along with the ruble after President Putin launched his invasion of Ukraine last month, but the country’s local financial markets have been largely shut down since the US and Europe imposed unprecedented sanctions aimed at removing Russia from the global financial system to cut off.

The ruble also fell on Monday, trading 5 percent lower at 104.5 against the dollar, according to Refinitiv data.

The Russian stock market remained closed on Monday. But over the weekend the central bank also took first steps to clear billions of dollars in stock deals for international investors trapped when Putin imposed capital controls in late February. The move banned Russia-based institutions from transferring foreign currency abroad.

The central bank confirmed there would be a window to complete pending trades in all currencies for “non-resident customers from unfriendly countries”.

Trades completed before February 28th – the day the exchange closes – can be settled and will remain open until April 1st. However, the funds remain in Russia as long as the controls are in place.

Holdings of Russian shares by foreign investors amounted to $86 billion at the end of 2021, Moscow Stock Exchange data shows.

The latest fall in Russia’s domestic debt comes after Moscow last week avoided a widely anticipated default on its foreign debt manufacturing an interest payment of $117 million.

Russia’s Treasury Ministry had earlier warned that Western sanctions could prevent it from making dollar payments to international investors, claiming the restrictions imposed by Russia’s central bank would force 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 foreign currency exports.

Russia’s foreign currency bonds, which western investors can still trade, also lost ground on Monday. A dollar bond maturing in 2043, which climbed to about 50 cents on the dollar last week, was trading at 42 cents — although it was still well above the less than 20 cent level earlier this month as investors braced for an immediate default.

Another $66 million in interest payments on Russia’s dollar debt is due Monday. Like last week’s coupons, it must be done within a 30-day grace period to avert a payment default.

Sterner tests of Russia’s willingness and ability to continue servicing its foreign debt are imminent, with a $2 billion repayment due on April 4. An exemption from Washington’s sanctions that allows US investors to receive interest payments on Russian debt also ends on May 25. Russia’s local bonds fall as Moscow takes first steps to reopen markets

Adam Bradshaw

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