“We think Russia will be in the isolated wilderness for a long time to come,” said Mark Dowding, the chief investment officer at BlueBay Asset Management. “A regime change in Russia is probably a pre-requisite for re-investment for many, along with lifting of sanctions.”
The drama with Russia’s bonds, however, has an impact on emerging markets as a whole. The Bloomberg Emerging Markets Hard Currency Aggregate Index dropped 5% since the start of the war, almost double the decline in global junk bonds.
Type C Accounts
The new procedure for debt settlements involve opening so-called Type C accounts, which can be done automatically without the consent or involvement of a foreign creditor, Morgan Lewis partner Grigory Marinichev said. The limited actions that holders of the accounts can perform include transactions with securities registered in Type C accounts and tax payments.
Even if the accounts were more flexible, moving the cash is going to be tricky because neither Euroclear nor Clearstream, the world’s biggest settlement systems, work with Russian assets anymore.
It’s even more complicated for holders of the accounts from nations the Kremlin designated as ‘unfriendly’ -- effectively any country that has imposed sanctions. They aren’t allowed to receive payments in dollars unless issuers get special permission. But also, they need approval to move rubles out of Type C accounts after the transfer has been made, according to Marinichev.
In other words, for investors based in so-called unfriendly nations, receiving transfers into Type Cs is “equivalent to paying into a blocked account,” Marinichev said. “You can’t repatriate those rubles.”
Either way, the finance ministry has warned that so long as its foreign reserves are frozen, there may be no payment in dollars. Russia’s total reserves are about $640 billion, but it can’t access about $300 billion, according to Finance Minister Siluanov. Data published in January shows that $100 billion of the reserves were held in U.S. dollars as of June, which was 16.4% of the total cash pile at that time. Holdings in euros were 32.2% and those in yuan were at 13.1% at the end of June 2021.
-With assistance from Anchalee Worrachate, William Shaw, Jenny Surane, Irene García Pérez, Selcuk Gokoluk and Daniel Flatley.
This article was provided by Bloomberg News.