Kazakh financial firms have been scooping up Russian government debt at a steep discount from investors unable to exit the market because of sanctions and other restrictions imposed after the invasion of Ukraine, according to people familiar with the matter.
(Bloomberg) — Kazakh financial firms have been scooping up Russian government debt at a steep discount from investors unable to exit the market because of sanctions and other restrictions imposed after the invasion of Ukraine, according to people familiar with the matter.
In recent months, some Kazakh brokerages and banks have been purchasing or making offers for Russian sovereign securities including so-called OFZ bonds, the people said, asking not to be named because the information is private.
Registering the debt with a Kazakh clearing house then enables buyers to collect coupon and principal payments, according to the people, who declined to provide additional details or names of companies involved in the transactions.
The workaround allows Kazakh firms to reap a quick paper profit for themselves and customers at a time when some international investors remain stuck with billions of dollars worth of ruble debt. Myriad restrictions block foreigners from collecting coupons and principal, but inside the country local investors can receive payments.
Foreigners’ share of the OFZ market, which held steady for months after the invasion, plunged in November to the lowest in more than a decade, according to Russian central bank data published on Thursday. It reached 13.2%, or 2.18 trillion rubles ($31 billion), as of Dec. 1.
The Kazakh regulator uses bond quotations on the Russian market to determine if companies can register capital gains on their books.
In Russia, OFZ securities due in 10 years have recovered close to face value, according to data from the Moscow exchange, indicating investors don’t expect to suffer losses. Back in August, when Bloomberg News reported that firms including Barclays Plc were facilitating an uptick in trading of the debt, the financial institutions were offering bids in the region of 20-25 kopecks on the ruble.
The Kazakh financial regulator didn’t reply to a request for comment. Kazakhstan’s Central Securities Depository said it couldn’t disclose information related to local broker registrations of bonds.
But it saw a 100-fold increase in eight months in the volume of registered eurobonds and OFZ debt issued by the Russian Finance Ministry, with their total as of Nov. 1 worth almost $800 million at the exchange rate at the time.
The sharpest increase in registrations took place in September, when they went up to 33 issues from 13, the Almaty-based depository said in an emailed reply to questions.
Kazakhs are able to navigate a bifurcated market that’s emerged for ruble bonds because their country has kept its financial and trade links with Russia intact while steering clear of backing the war or recognizing the annexation of Ukrainian territories.
By contrast, many foreign investors with ruble-denominated sovereign bonds were left with notes on which they can no longer access interest payments outside Russia. A sale means they could recoup at least some value.
Russia defaulted on its external sovereign bonds in late June, the result of international sanctions that blocked payment channels to overseas creditors. Still, Moscow has said it has the money and desire to pay bondholders that aren’t cut off from the Russian currency.
–With assistance from Irene García Pérez.
(Updates with foreigners’ OFZ share in fifth paragraph.)
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