VTB head proposes Eurobond substitutions be made mandatory, independent of where they are accounted for - sources

MOSCOW. Dec 29 (Interfax) - VTB CEO Andrei Kostin has made a proposal to Russian President Vladimir Putin to oblige Russian legal entities to issue "substitute" local bonds instead of Eurobonds in circulation. At the same time, all Eurobonds should be exchanged for domestic bonds, regardless of which depositories keep records of the rights to them. The relevant letter was sent to the president in early December, a source familiar with the text of the document told Interfax.

In his letter, the head of VTB recalls that as a result of economic sanctions against Russia and the unfriendly actions of settlement and clearing systems, the rights of Russian holders of Eurobonds were infringed - they lost the opportunity to receive payments on time and freely dispose of their investments in Eurobonds of local borrowers.

Kostin noted that a number of timely measures have partially resolved the problem. The presidential decree from July 5, which required Russian borrowers to relay payments on Eurobonds to holders whose rights are recorded by depositories of Russia, through separate payments or through the transfer of "substitute" bonds, has protected the rights of resident investors who have accounts in Russian depositories to receive payments. But in terms of free disposal of Eurobonds, these investments remain virtually frozen in the international financial infrastructure for all owners, including residents, whose rights are accounted for in foreign depositories, the VTB chief said.

The solution to the problem, according to Kostin, is the issue of "substitute" bonds - they do not create any additional burden on borrowers, and the risk of technical default is mitigated by the fact that already conducted transactions have been de facto recognized by international accounting systems. However, to date, no more than a quarter of Russian issuers of Eurobonds have issued local securities for substitution, and most borrowers are not willing to make an additional effort to protect investors' rights, limiting themselves to the mechanism of separate payments, which structurally does not solve the problem, he said.

The VTB chief believes that it is necessary to make replacement of Eurobonds with local debt securities mandatory for all Russian borrowers and apply this mechanism to all Eurobonds, regardless of where they are accounted for. This approach would ensure uniform and equal conditions for all investors, including those who hold securities in international settlement and clearing systems. It is proposed that the relevant changed be instituted by a presidential decree, obliging Russian legal entities with liabilities related to Eurobonds to ensure that all holders of Eurobonds can exchange them for "substitute" bonds in the order provided by the law from July 14 [the document sets out the procedure for issuing local "substitute" bonds].

Another Interfax source confirmed the letter and said that Putin instructed Prime Minister Mikhail Mishustin, Central Bank chairman Elvira Nabiullina, and his aide Maxim Oreshkin to consider and submit coordinated proposals on the subject mentioned by Kostin.