Putin signs decree on mandatory placement of 'substitute' bonds by Jan 1, 2024
MOSCOW. May 22 (Interfax) - Russian President Vladimir Putin has signed a decree on the mandatory placement of "substitute" bonds by Russian borrowers by January 1, 2024.
The text of the decree was published on Monday on the government's official internet portal of legal information.
The decree says Russian legal entities that have obligations related to Eurobonds must ensure compliance with obligations to Eurobond holders, whose rights are recorded in Russian depositories, by placing bonds before January 1, 2024. Payment upon placement is rendered in Eurobonds or in cash, with the funds intended for the purchase of Eurobonds.
The decree enters into force as of the day of its publication.
Borrowers will be able to carry out additional issues of such bonds an unlimited number of times, while the volume of a substitute bond issue must be similar to the volume the Eurobond issue for which obligations have not been honored.
If the holder of Eurobonds, whose rights are recorded in the Russian Federation, does not buy substitute bonds during the period of their placement, obligations to the holder will honored by transferring funds in the manner prescribed by the Central Bank's board of directors - this is currently a separate payment through NSD.
Russian legal entities can obtain the right to exception from the obligation to place substitute bonds after obtaining permission from the government commission for foreign investment. The procedure for issuing such permits is established by the government.
The decree does not apply to borrowers who, before the decree came into force, had already placed local bonds to replace Eurobonds.
Russian issuers themselves could until recently choose how to effect payments on Eurobonds to investors whose rights to Eurobonds are recorded in Russian depositories. The issuers can do this either by arranging separate payments to the holders in the Russian and foreign infrastructure, or by transferring new local bonds to investors in order to replace Eurobonds.
The Russian presidential decree No. 430 dated July 5, 2022, which the new decree amends, envisages both options, with investors whose rights are recorded in the Russian Federation receiving their respective payments in rubles, in both cases, at the exchange rate of the Central Bank of Russia as on the date of payment. The Finance Ministry, Economic Development Ministry, and the CBR since the beginning of the year have been discussing amendments to the paragraph of the decree on fulfilling the obligations to Russian holders regarding Eurobonds, which would render issuing substitute bonds mandatory for borrowers.
VTB CEO Andrei Kostin at the beginning of December made a proposal to Russian President Vladimir Putin to oblige Russian legal entities to issue substitute local bonds instead of Eurobonds in circulation. After that an instruction was given for ministries and the Central Bank to consider the initiative. The Association of Bondholders also came up with an idea to make the issuance of substitute bonds mandatory, obliging state and quasi-state companies hit by Western sanctions to replace Eurobonds.
The mandatory substitution of Eurobonds with local bonds will restore the rights of Russian investors, who will be able to obtain a full-fledged financial instrument, director of the Russian Finance Ministry's Financial Policy Department Ivan Chebeskov said on February 8. "
A borrower seeking an exemption from the obligation to replace outstanding Eurobonds with local bonds would have to "make a huge effort" in order to prove to the relevant government sub-commission the need for the exemption, Central Bank First Deputy Governor Vladimir Chistyukhin told Interfax in an interview, commenting on the draft decree. The government sub-commission has accumulated much experience and is so conservative in its decisions that "it would be necessary to try very hard in order to prove which of the two evils is more - going for the substitution rather than staying in the past paradigm," he said.