Russian debt coin toss will get harder to call

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LONDON, March 8 (Reuters Breakingviews) - Fortune favours the bold. Russian state-controlled energy giants look set to repay U.S. dollar bonds coming due this week, confounding fears that Moscow may block payments. Investors who bet on a payout could double their money. The trick may get harder to repeat.

Holders of Russian debt are running the gauntlet. Western countries have frozen much of the country’s $630 billion of foreign currency reserves, sanctioned its central bank, and kicked numerous lenders out of the SWIFT payments system. Those restrictions have raised fears that debt payments may not reach Western investors.

The Kremlin is also talking tough. An executive order issued last weekend permits Russian companies to repay dollar debt owed to investors from “unfriendly” states in roubles. That would be tantamount to a default. It’s exacerbated fears about the $136 billion of foreign currency debt owed by the government and private sector.

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So far, those fears have proven unfounded. Gazprom has repaid a $1.3 billion bond, while Rosneft (ROSN.MM) is expected to honour a $2 billion note this week. The state-controlled gas giant’s security was quoted at below 50% of face value as of March 3, according to Refinitiv data, handing big gains to any funds lucky enough to snap it up on the cheap.

Gazprom has little to gain from throwing its creditors under the bus. It had some $13.5 billion of cash on its balance sheet at the end of 2021, as per Refinitiv forecasts, and the spike in energy prices will have boosted its coffers. A default could encourage distressed debt investors to seize the group’s gas storage facilities in continental Europe, impeding future gas sales.

Traders may be tempted to pile into other bonds trading at distressed levels, like metals group Norilsk Nickel (GMKN.MM) and energy giant Lukoil (LKOH.MM). Yet Moscow’s attitudes could harden. The United States is pushing for an embargo on Russian oil, while the European Union wants to wean itself off Russian gas. If the Kremlin’s cash flow dries up it may impose tougher restrictions on foreign currency payments. For creditors, recovering claims could be tricky. JPMorgan analysts estimate that Gazprom’s assets outside Russia would cover as little as 13% of its roughly $50 billion of foreign currency debt. Bottom-fishing in Russia will get harder.

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

CONTEXT NEWS

- Russian gas giant Gazprom repaid a $1.3 billion bond as expected, Reuters reported on March 7, citing an investor holding the security. State-owned oil group Rosneft will on March 9 repay a $2 billion bond, IFR reported on March 8, citing a company presentation to investors and analysts.

- Investors had been unsure if the companies would repay the bonds after Russia placed restrictions on payments to foreigners holding its securities in response to drastic sanctions imposed by Western allies following the invasion of Ukraine. The Gazprom bond had been quoted at below 50% of par value on March 3, according to Refinitiv data.

- A decree by Russian president Vladimir Putin on March 5 allowed the Russian government, companies and citizens to temporarily pay foreign currency debts owed to overseas creditors from “unfriendly countries” in roubles. Those countries include the United States, European Union countries, Britain, Japan, Canada, Norway, Singapore, South Korea, Switzerland and Ukraine.

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Editing by Peter Thal Larsen and Oliver Taslic

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