What foreign currency bonds are available to Russian investors today?

The number of available financial instruments in foreign currency for Russian investors has sharply decreased after the introduction of tough sanctions against the St. Petersburg Exchange. However, investors who want to reduce the risks of ruble devaluation have the opportunity to invest in foreign currency bonds. The largest volume of substitute bonds denominated in US dollars is represented on the Russian market. Moreover, the number of issuers in the near future will amount to several dozen. But investors also have access to substitute bonds in euros, pounds sterling, Swiss francs, as well as local bonds in yuan and even dirhams. However, when choosing them, it is worth taking into account the level of liquidity, profitability and the currency in which settlements are made on them.

Outgoing shares

At the beginning of November, strict American sanctions were introduced against the St. Petersburg Exchange. On November 2, OFAC added the exchange to the SDN list, after which all transactions with more than 2 thousand shares and depositary receipts of foreign issuers were frozen. Until January 31, 2024, the exchange has an OFAC license to exit foreign securities, but consultations with counterparties are currently ongoing on this issue.

As a result, the acquisition by Russian investors of securities of foreign issuers becomes many times more complicated. Nevertheless, they still have the opportunity to purchase financial instruments denominated in foreign currencies, which continue to circulate in the domestic market. These include local yuan bonds, as well as a wide range of replacement bonds.

Diverse debt

Replacement bonds are the largest group of foreign currency bonds traded in Russia. According to the chief analyst of debt markets at BC Region, Alexander Ermak, bonds of 31 issues of 8 issuers are currently available to investors. The volume of issued securities is estimated at 1.4 trillion rubles. (almost $21 billion). At the same time, the market contains both short-term issues, repayable next year, and medium-term issues, repayable in 2025–2028. There are also a dozen long-term issues in circulation with maturities in 2029–2037 and several “perpetual” issues (without maturity, but with a regular put option).

More than half of the total volume of foreign currency securities is accounted for by bonds denominated in US dollars (21 issues of 8 issuers for $11.3 billion). The volume of eight issues in European currency is estimated at €6.5 billion.

The rest of the volume comes from ruble issues, as well as issues in Swiss francs and British pounds. Dollar replacement bonds are represented from all issuers. But only Gazprom bonds are in circulation in other unfriendly currencies.

Over the ten months of this year, five Russian companies placed classic yuan bonds worth CNY 19.7 billion. Last year, issuer activity was noticeably higher – ten issuers placed bonds worth CNY 60.5 billion. However, this year Rusal also placed bonds in UAE dirhams in the amount of AED 370 million.

Yield struggle

Investments in foreign currency bonds are attractive not only by minimizing the risk of ruble devaluation, but also by high returns. Since the beginning of the year, the yield on the Cbonds index of replacement bonds has increased from 6.5% to 7.7% per annum, while at its peak in August it reached 10.8% per annum. According to portfolio manager of Alfa Capital Management Company Artem Privalov, yields increased as new proposals from issuers entered the market, and as they were digested, yields adjusted. “Over the last month and a half, there has been a steady positive trend against the backdrop of increased demand from retail and non-bank buyside, apparently associated with the weakening of the ruble since the beginning of the year,” said Alexey Bulgakov, head of the debt market analytics department at Renaissance Capital.

The yield of the bond index in CNY Cbonds increased from 3.6% to 5.7% per annum.

In the yuan bond market, the first transactions took place with relatively low yields (when compared with bonds of Chinese peer companies) due to increased demand for foreign currency assets within the country, when traditional currencies became unfriendly, according to VTB My Investments analysts. As the market filled with new names and the volume of the market increased, as well as against the backdrop of competition from replacement bonds, “prices for bonds in yuan were adjusted, their yields converged, but are still inferior in attractiveness to replacement bonds,” experts note.

Settlement ruble

When choosing securities, it is worth considering the mechanism for paying coupons and redemptions. In the case of replacement bonds, all payments will be made in rubles at the Central Bank exchange rate; in yuan bonds, payments are made in CNY. According to Alexey Bulgakov, in the case of yuan bonds, the exchange can carry out conversion in the currency of the holder’s choice.

But the liquidity of such securities is lower than the replacement ones, which means that, if necessary, it will be easier to sell the latter. “Issues in CNY are very illiquid, because initially they were actually private placements in favor of commercial banks. Replacement bonds for the most part are quite liquid, which is due both to the small amount of time that has passed since the initial placements and to the ongoing rotation of the holder base,” notes Mr. Bulgakov.

Substitution Expansion

In general, market participants expect an expansion of the list of foreign currency bonds, but primarily through the issuance of replacement bonds. In accordance with the presidential decree, by January 1, 2024, all Russian companies with Eurobonds will have to replace them with local bonds. “Currently in the process of collecting applications there are two perpetual issues of Tinkoff Bank (in dollars), one issue each of Alfa Bank (in rubles) and STLC (in dollars),” notes Mr. Ermak.

In addition, a dozen issuers, including MKB, Sovcombank, and HKF-Bank, made decisions on two dozen issues. The total nominal amount of new issues is estimated at more than $10 billion. However, based on previous placements, an average of 40% of the declared issue ends up on the domestic market. Most of these issues are denominated in US dollars, but two issues (ICB) are denominated in euros.

In the replacement bonds next year, according to Artem Privalov, the lack of new supply will play a big role after all issuers have carried out replacements. This can become a catalyst for price growth in the market, since when old issues are redeemed, money will return to the market. “There remains approximately the same amount of money in the market, but there are fewer instruments for investment,” he notes.

Vitaly Gaidaev