Foreign investors from countries Russia deems unfriendly have been offloading billions of rubles' worth of Kremlin OFZ treasury bonds at steep haircuts of up to 85%, bne IntelliNews can reveal.
A year ago, Russia imposed restrictions on foreigners’ holdings in response to sweeping Western sanctions over its war in Ukraine, leaving many non-resident investors unable to sell or receive interest payments on certain investments. Coupon payments to foreign investors holding ruble-denominated sovereign debt, known as OFZs, were frozen, while Russian companies were also barred from paying dividends to overseas shareholders.
As restrictions were eased in Autumn last year, foreigners began dumping their OFZ debt, and that process has accelerated in 2023.
“A bunch of us took 85% hits when the stuff traded up last year,” Paul McNamara, an emerging markets bond fund manager at London-based GAM, told bne IntelliNews. “I don’t think any real size got done last year, so the big houses still have some.”
Traders indicated that foreigners had slashed their investment in OFZs by about RUB350bn ($4.6bn) since the beginning of this year.
The share of foreign investors of OFZs had shrunk to 11.1% by the beginning of this year, according to the Central Bank. That is the lowest level since September 1, 2012, when the share was 10.6%.
The maximum level of foreign investment in OFZs was recorded on March 1, 2020, when their share spiked at 35%. After that, foreign investors gradually reduced their exposure to Russian securities due to increase geopolitical risks and the tightening of US monetary policy.
By November 2022, the share of foreign investors had decreased to 17.6% and in December to 13.2%. The Central Bank attributed the significant decline to the transfer by some foreign investment funds of their securities from foreign depositories to the Russian accounting system.
Bondholders using Clearstream as their depository were allowed settle OFZ bond trades during a September-October window last year. Investors estimated that Clearstream had more than $10bn of sovereign ruble bonds under custody.
In December, Luxembourg's finance ministry authorised the release of certain frozen funds held by Clearstream by the Russia’s National Settlement Depository. Analysts from Otkritie Investments claimed that Luxembourg appeared to have taken numerous appeals from investors and Russian depositaries into account.
Owned by MOEX Group, which also runs Russia's bourse, the NSD is equivalent to the Euroclear and Clearstream settlement and clearing houses and plays an important role in the country's financial system as an intermediary with international markets.
Central Bank Governor Elvira Nabiullina refused to say this month how much money is held in special non-resident bank accounts, known as Type C, but it continues to grow. Interfax reported in November these accounts hold more than RUB280bn ($3.7bn), citing regulatory sources.
Russia’s bond market is the only real functioning part of Moscow’s capital markets, which used to generate well over $1bn per annum in investment banking fees. E-scooter firm Whoosh raised $33mn in December in the sole IPO last year, while the only M&A activity has been nationalisations and fire sales by foreign companies.
Moscow traders say there is activity on the OFZ market but it’s still incredibly thin compared to where it was prior to the war. Russian banks have shrunk their ruble bond issuance by about 60% but corporates are still issuing a lot of paper.
Fixed income sources say Gazprombank has now become the leader in debt capital markets after overtaking its state-owned rival Sberbank. Gazprombank, the financial arm of Russian gas exporter Gazprom, has largely escaped harsh sanctions partly because it handles payments for energy.
Traders estimate that ruble coupons will total about RUB3 trillion this year and they will be re-invested. However, there will be no fresh capital coming, so there will be RUB3 trillion available to be invested in OFZs and first tier corporate debt.
“The Russian market is now all about bonds, because you can forget about stocks,” said the head of fixed income trading at a Moscow bank. “It was true after the dismemberment of Yukos and now it’s as true as ever, because Russians honour debt obligation. As for stocks, they are purely based on retail speculation and insider trading.”
In November last year, bne IntelliNews revealed that Sweden’s Prosperity Capital and East Capital have billions of euros of Western investment money frozen in Russia following the invasion of Ukraine.
East Capital said the move to sanction the NSD in June was unexpected and makes it nigh on impossible for European investors to trade Russian equities.
“Indeed, all our positions are held in the NDS, with whom brokers and custodians are reluctant to have any dealings with until there is clarification around sanctions,” said East Capital. “Our hope is that this is an unintended impact of these sanctions, and the EU will issue a clarification that permits trading of secondary equity and debt via the NSD.”