Russia has introduced new rules for foreign creditors.

Russian authorities announced over the weekend that the Russian state and Russian companies would be allowed to service debts in countries "that engage in hostile activities" in rubles.

This refers to states that are participating in sanctions against the Russian economy as a result of the Russian attack on Ukraine.

On Monday, the Kremlin's announcement was followed by a list of countries affected by the new rules.

These include the countries of the European Union, the United Kingdom, the United States of America, South Korea, Japan and Taiwan.

Gregory Bruner

Editor in Business.

  • Follow I follow

Due to the dynamic development of the situation around Russia, there are still uncertainties as to how the payments are to be classified legally.

Christoph Kutt, expert for fixed-income securities at DZ Bank, sees clarity above all in many bonds that were issued after the Crimea crisis in 2014: "These bonds have a currency option in the prospectus, which allows payment in different currencies such as dollars, euros, Pounds – and also rubles – allowed.” These options are now being used, says Kutt.

In this case, the exchange rate risk lies with the creditor.

If the debt is serviced on time in the agreed currency, the issuer makes no mistake.

According to Kutt, what the creditor does with the rubles he receives is up to him.

The Russian currency has fallen around 43 percent against the euro since the beginning of the year.

However, since the announcement appears to relate to all foreign debt – an exemption can be granted for states that have not imposed sanctions on Russia – there is a possibility that debt denominated in other currencies will also be paid in rubles.

"Then it is definitely a matter of default," says LBBW chief economist Moritz Kraemer.

"Because the original promise to pay - a certain amount at a certain time in a certain currency - was not kept.

Regardless of the underlying exchange rate.”

In order to be prepared for all situations, Christoph Kutt recommends first looking at the prospectus for the securities in the custody account again and otherwise getting legal advice.

"What happens to the debt - whether no payment is made, whether you can insist on payment or whether debt restructuring makes sense - must be decided on a case-by-case basis."

Despite the rules, energy supplier Gazprom repaid a $1.3 billion bond issue Monday and serviced interest on another, according to Bloomberg finance agency.

Other companies, such as oil and gas producer Rosneft, are also said to have initiated payments for dollar-denominated debt.

Bloomberg speculates that the payment processes started before the announcements by Russian President Vladimir Putin and were not affected by the new rules.

Last week, analysts at the American investment bank JP Morgan recommended buying Russian corporate bonds.

Among other things, they spoke out in favor of buying bonds from the oil company Lukoil PJSC.

This maintains larger businesses abroad, which generated around 3.5 billion dollars in revenue in 2021, and was also only slightly indebted abroad.

The current price of corporate bonds with a term until 2030 of 20 to 40 American cents per dollar does not reflect the catch-up potential of the paper.

As the conflict between Russia and Ukraine unfolds and in light of the sanctions, there is uncertainty about how Russia intends to service its debt.

"We see default as the most likely scenario," wrote Simon Waever, chief strategist for emerging market government bonds at American investment bank Morgan Stanley, on Monday.

The earliest date for insolvency would therefore be April 15th.

That is the day coupon payments are due on dollar bonds that run through 2023 and 2043, respectively.