Foreigners selling Russian assets to pay 10% to the state, but foreign bond holdings falling

Foreigners selling Russian assets to pay 10% to the state, but foreign bond holdings falling
Foreign companies existing Russia will have to pay up to 10% of the net value to the budget, but bond holders have reduced their exposure. / bne IntelliNews
By bne IntelliNews March 28, 2023

Foreign companies that want to exit Russia will have to pay 5%-10% of their value to the state budget as a form of “exit tax,” Ministry of Finance (MinFin) said on March 27, as the share of foreigner holding of federal treasury bonds has fallen by over RUB1 trillion in the last year.

Companies from "unfriendly" countries that decide to withdraw their assets from Russia will be required to pay a fee of 5-10% of the market value to the Russian budget, according to a recent extract from the minutes of the meeting of the subcommittee of the government commission on control over foreign investment on March 2, MinFin reported on its website.

The document outlines that if the assets are sold at a discount of more than 90% of their market value indicated in the asset valuation report, non-residents from "unfriendly" countries will be obliged to voluntarily contribute at least 10% of the market value of these assets to the Russian budget. If they sell assets without such a discount, the voluntary contribution will be at least 5% of the market value of these assets.

The subcommittee already released conditions for foreign countries wanting to exit Russia in December 2022 that included a cap on the sale price of 50% of the asset's value following an independent valuation and an additional “voluntary donation” to the federal budget to expedite the permission to take the payment out of Russia. Currently all large transfers of foreign exchange out of Russia have to be approved by the CBR.

The new exit rules are seen as an extra deterrent to hinder companies from "unfriendly" countries who want to leave the Russian market. And few have actually fully exited. Following the invasion of Ukraine over 1,000 companies announced they were suspending operations, according to a report by Yale that tracked these plans. However, a year on, as bne IntelliNews reported, less than 9% of these companies have followed through on these announcements. The combined turnover of these companies is worth the equivalent of 40% of Russia’s GDP, according to Yale.

Stocks and bonds

Foreign portfolio and bond investors also have billions of dollars' worth of securities trapped in Russia since war started over a year ago and the Central Bank of Russia (CBR) imposed stringent capital controls.

Bond traders have been especially hard hit as most international traders were overweight on Russian Finance Ministry’s OFZ treasury bills, which were paying a handsome 6%-plus yield at a time when global interest rates in most major economies had been cut to near zero. Those yields rose in 2021 as tensions escalated to over 9% as many traders rejected the idea that Russia could launch a war in Ukraine. Since the war began on February 24 they now find themselves trapped in the market.

Nevertheless, foreign investors from “friendly” countries have already been given permission to buy and sell OFZ again, providing a route for some to exit.

The share of foreign investors holding OFZ peaked in March 2020, when they held 34.9% (RUB3.2 trillion) of the outstanding bonds, but that share started to fall as tension mounted in the next two years: in February 2021 foreigners' share of the bonds had fallen to 17.8% (RUB2.8 trillion) at a time when the volume of issued bonds had almost doubled over the preceding two years to a total of RUB15.6 trillion OFZ outstanding.

The CBR has suspended its regular reporting of bond auction results, but now says the share of foreign investments in the federal OFZ bonds has edged down to 9.7% as of March 1, 2023 from 9.9% as of February 1, 2023.

The CBR also said that foreign residents have reduced their holdings of PFZ by just over RUB1 trillion since the start of the war, and holdings currently stand at RUB1.766 trillion ($23.1bn) as of early March 2023 against the total market volume of RUB18.24 trillion ($238.3bn).

Portfolio investors also have tens of billions of dollars trapped in Russia, but as part of the SWIFT sanctions that were imposed only days after Russia’s invasion of Ukraine in February,  the ties between the international settlement and payments company Clearstream and Euroclear have been suspended, making it impossible to sell these share or take the proceeds out of the country. Various large funds and investment banks have been lobbying the EU to lift these restrictions as a large share of these holdings belong to retail investors as part of their pension savings, but so far to little effect.