International efforts to punish Russia for its invasion of Ukraine by crippling its access to capital markets may not represent a big blow for the sovereign as the country's huge level of central bank reserves and relatively healthy financial metrics means it is well prepared for a financial siege.
The invasion triggered a series of sanctions by the US, European Union, the UK and others. They included a measure from the US Treasury, through its Office of Foreign Assets Control, to bar trading of any new Russian sovereign debt from March 1, as well as a series of comments from policymakers, including US president Joe Biden, which suggested that Russia would be blocked from issuing new debt in the international capital markets. The EU and UK also announced proposals that would bar the trading of securities issued by Russia.
Russia has a low level of government debt, a balanced primary budget and therefore has no urgent need to access the market even though it has a US$2bn bond coming due on April 4.
That repayment is a tiny amount in the context of the nearly US$635bn in gold and foreign exchange reserves the central bank held as of early February.
"With its FX reserves at over US$600bn there is no requirement to refinance maturities as these can be repaid instead," said an investor.
Russia has been fading its presence in the international bond markets over the past two years. It sold just €2bn in hard currency bonds in 2020 and €1.5bn in 2021.
It was a bigger issuer in each year between 2016 – when it returned to the international capital markets following its annexation of Crimea two years before – and 2019. It raised just under US$7bn in 2017, for example, (all through US dollar-denominated bonds) and more than US$6bn-equivalent in 2019 (through US dollars and euros). Throughout that period, though, the oil price was much lower than it is now, with the commodity climbing above US$100 a barrel last week.
Russian corporates and banks had been expected to be out in force during April and May, looking to access 144A funding off the back of publishing their financials. "There were at least a few corporates in the country looking to do something in the coming months, and also quite a few more from the CIS region in general," said a DCM syndicate banker. But that pipeline is now frozen.
Bankers said most Russian corporates that issue in the US dollar or euro markets are commodity exporters and are reaping free cash from the rally not just in oil but across metals too. "Most of these companies can manage with the cash they have and can pool other sources of funding if needed," said a second DCM syndicate banker.
But those assumptions may prove inaccurate if sanctions mean Russian companies are unable to use the global financial system, with reports last week suggesting that Russian oil contracts were trading at significant discounts because traders could not secure credit from banks wanting to avoid being caught out by sanctions.
The international loan market is also likely to be off limits for Russian corporates. There are US$14bn of syndicated term loans, pre-export facilities and revolving credit facilities to large Russian corporates scheduled to mature over the next two years. Some US$8.8bn of that matures over the next 12 months, according to LPC data.
Banks say there is no clarity yet what will happen with these loans, and that refinancing will depend largely on whether more stringent sanctions targeting specific companies or sectors are introduced.
“We have no idea for the moment if it is possible to refinance these facilities,” said one loans banker. “For the most part banks can’t express views as they are still waiting for internal guidance. Ability to refinance individual clients depends on what sort of sectoral sanctions are imposed. In an extreme scenario they will have to refinance in another currency or with Russian banks, but we are not there yet.”
New lending has also ceased. No Russian syndicated or club loans have closed yet this year.
Additional reporting by Sandrine Bradley and Alasdair Reilly