25 Nov 2022 12:17

Banks want option to swap sovereign Eurobonds for OFZ, but no consensus yet - Siluanov

MOSCOW. Nov 25 (Interfax) - The option to swap sovereign Russian Eurobonds in 2023 for new federal loan bonds or OFZ, which was included in the draft federal budget while it was being prepared for its second reading, emerged as the result of dialog with banks, but there is no consensus on the terms for a potential deal with them, Finance Minister Anton Finance Minister Anton Siluanov said.

This amendment, drafted by the Finance Ministry and approved by the State Duma together with other government amendments to the draft budget, grants the government the option to exchange sovereign forex-denominated Eurobonds for new federal loan bonds or OFZ with a nominal value of up to 800 billion rubles in 2023. Government securities denominated in foreign currency will be exchanged only for ruble-denominated securities with the same or longer maturities. The bonds would be exchanged at their market value, to be determined by the government and in agreement with bond holders. Separately, the amendment stipulates that the Bank of Russia has the right to receive government securities denominated in rubles during their initial placement as part of the exchange of FX-denominated Eurobonds held by the Central Bank.

"We know of such approaches [on the subject of a possible swap] primarily from financial organizations, from banks, proposals to resolve the issue of an open currency position. That is, our financial institutions have invested large amounts in Eurobonds, in securities with foreign participation. The proposal is to exchange these investments for Russian ones, for issues of Russian securities. We have met with a number of banks on this matter," Siluanov said in an interview with Nailya Asker-zade on the Rossiya 24 TV channel.

"But our proposal was as follows: we are ready for a swap, to do an exchange, but based on today's market prices for Eurobonds. Our bankers found not everything about our proposals to their liking," Siluanov said.

He said the MinFin was ready "to move in this direction," but acting "on the basis of the prices that are emerging for these assets."

"That is, we determine the price of Eurobonds on the market, we are ready to issue ruble bonds and, accordingly, make such exchanges. But not everyone is satisfied with this today. So we are in a dialogue. A final decision is still under review," Siluanov said.

The MinFin's rationale for the amendment is that Russia's external debt will decrease as the a result of a possible exchange of Eurobonds for ruble securities, and this will lead to a reduction of currency risks associated with debt servicing. However, the ministry notes, it is also necessary to take into account the fact that yield on Eurobonds is lower than yield on ruble-denominated government debt bonds. Thus, depending on the configuration, the exchange will either lead to an increase in the cost of servicing public debt in the long term, or to an increase in the public debt itself, or both.

The MinFin said debt on Russian Eurobonds was around $35.7 billion on October 1, 2022. The ministry is now carrying out all payments on Eurobonds in rubles, as per a presidential decree of June 22.

The 800 billion rubles of OFZ is equivalent to $13.2 billion at the Central Bank's current rate.

Exchanging sovereign Russian Eurobonds for local bonds has not been widely discussed until now. Corporate borrowers have the opportunity to replace Eurobonds with bonds issued under Russian law, but in the same currency as the exchanged Eurobonds. Payments on these "substitute" bonds are made in rubles at the Central Bank rate on the date of payment.