Market braces for end of Russia central bank sanctions carve-out

Isda AGM: general licence expires on May 25, threatening bond payments and deliverable ruble settlement


There are fears that a decision not to extend carve-outs from sanctions for the Central Bank of Russia this month may create disorder in the sovereign debt and deliverable ruble derivatives markets.

The Russian central bank is currently subject to sanctions from the US Treasury’s Office of Foreign Assets Control (Ofac) but has a so-called general licence that allows market participants to receive coupons on Russian sovereign bonds.

This licence expires on May 25 and although it has been extended once before, there are growing concerns that it might not be moved again. The prospect is causing concern among market participants given the next coupon payment on Russian sovereign debt is due on May 27.

“Will Ofac extend that licence? Things keep escalating, which would perhaps indicate that may not happen,” said Maria Douvas, global co-head of legal coverage for fixed income at Morgan Stanley.

Ofac sanctioned the central bank on February 28, following Russia’s invasion of Ukraine, and granted a range of general licences to ease operational issues in the market. The central bank made five coupon payments on Russian sovereign debt in March. After threatening to pay its April 4 coupon in rubles, it eventually made that payment on time in dollars.

Douvas said that as the cash for the latter coupon came from the central bank’s non-frozen funds, Ofac may be incentivised to roll over the licence in order to run the funds down.

“They paid out of their own controlled dollar reserves instead of bond reserves. So it might be serving policy objectives of the US to drain those reserves,” she said.

Douvas was speaking at the International Swaps and Derivatives Association’s annual general meeting in Madrid today (May 11).

The Russian central bank also has a general licence permitting market participants to transact with the entity as an operator of a settlement system. This is significant because of the diminishing availability of local correspondent banks through which physically delivered foreign exchange contracts involving rubles have traditionally settled.

“The population of correspondent banks is reducing – we are seeing more and more sanctioned and foreign banks that have a presence in Russia sell those assets to local Russian entities who are sanctioned or might become sanctioned in the future,” said Douvas.

If the licence is not extended and it becomes impossible to settle the trades, she said ruble contracts could make use of a bilateral template recently issued by Isda and the Emerging Markets Traders Association (Emta), which would flip the trades to become non-deliverable and settled in US dollars.

Special delivery

For non-deliverable forwards (NDFs), Emta released new documentation in April that will allow market participants to use a London-based fixing for US dollar/ruble trades, instead of the onshore rate set by the Moscow Exchange.

Standard Emta documentation uses the Moex rate, but after sanctions were imposed on Russian banks following the invasion of Ukraine, the onshore rate started to diverge significantly from the spot rates seen on London-based primary spot markets such as EBS.

It’s expected that from June 6, traders will be able to use contracts that take their exchange rate from the WM Reuters 4pm fix rather than Moex. If a WM Reuters fix cannot be made in the offshore market, the contracts would fall back to the Moex fixing.

Isda oversees the documentation for deliverable forwards, and Rick Sandilands, the industry body’s senior counsel for Europe, says it is asking members whether they want the option to align with NDFs and use WM Reuters as the primary ruble fixing.

“We’ve been talking to our members again – in the knowledge that alignment was such an overwhelming consideration for them on their deliverable trades – to ask if they want us to publish something that will help them align with Emta’s new template,” said Sandilands.

This also applies to interest rate derivatives if payment is deliverable in rubles and that becomes impossible – meaning the amount is converted to dollars or rubles at a given fixing.

Sandilands said Isda is also looking to release a bilateral template that would allow market participants to apply the changes to their legacy deliverable forwards trades.

It’s not clear whether Emta will provide a solution to convert legacy NDFs. A spokesperson for the group did not respond to a request for comment on the topic.

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