London

RUSSIA and Russian companies will be allowed to pay foreign creditors in roubles, according to a decree signed by President Vladimir Putin on Saturday (Mar 5), as a way to service debt while capital controls remain in place.

The decree establishes temporary rules for sovereign and corporate debtors to make payments to creditors from "countries that engage in hostile activities" against Russia, its companies and citizens.

The government specified on Saturday that it will prepare a list of such countries within two days.

Russian corporate bonds denominated in foreign currencies have plunged to deeply distressed levels in recent days as investors weighed the impact of sanctions imposed on the country in the wake of its invasion of Ukraine.

The Russian government responded to the penalties by dramatically reducing access to foreign currencies, which could restrict the ability of bondholders to receive interest and principal payments.

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Separately, clearing houses Clearstream and Euroclear stopped accepting the rouble as settlement currency and have excluded all securities issued by Russian entities from all Triparty transactions, barring a traditional channel used to make payments to bondholders.

According to Saturday's decree on servicing foreign-held debt, payments will be considered executed if they are carried out in roubles at the central bank's official rate. Debtors can ask a Russian bank to create a special "C" rouble-denominated account in the name of foreign creditors for settlement, while local creditors will be paid through Russian depositories. The rule applies to amounts in excess of US$81,358 per month.

Russia's central bank said on Sunday that foreign creditors from countries that have not imposed sanctions may be able to receive the payment in the currency in which the debt is denominated if the Russian debtor gets a special permission to do so.

On Mar 2, Russia made payment on a 11.2 billion-rouble (S$134.6 million) coupon for 339 billion roubles of sovereign bonds known as OFZs due February 2024. While Russia's National Settlement Depository received the money, foreign bondholders weren't paid because of the central bank's order barring foreign payments. That triggered a debate over whether or not that constituted a default.

Some of Russia's foreign sovereign bonds do allow payments in roubles. That's a potential problem for holders of credit-default swaps (CDS), which are derivatives that insure against defaults.

JPMorgan Chase & Co strategists led by Trang Nguyen say that the optionality to pay in roubles "may render these bonds out of scope for CDS as 'obligations' and 'deliverable obligations'", because the rouble is the domestic currency of the issuer, and it just so happens to not be a hard currency, such as the US dollar or euro. "This means that bonds with rouble fallback provisions can neither trigger CDS nor be delivered into CDS," Nguyen said in e-mailed comments on Sunday.

Russia has US$117 million worth of coupons on dollar bonds coming due on Mar 16 that don't have the option to be paid in roubles, the JPMorgan strategists said. If Russia decides to pay in roubles following Putin's decree, "that would be an event of default and would trigger CDS", Nguyen said.

The CDS cover a gross US$41 billion of Russian debt, according to the Depository Trust & Clearing Corp. BLOOMBERG