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. Last Updated: 07/27/2016

Debt Revamp Foes Get 5-Year Penalty




The Finance Ministry said Wednesday that the handful of Western investors who rejected Russia's domestic debt restructuring plan will have proceeds from their original paper blocked for five years.


Bella Zlatkis, head of the Finance Ministry's securities department, said at a news conference that earnings from nonrestructured GKO treasury bills and OFZ bonds can only be used to buy state securities from the Finance Ministry at face value, not at the market rate.


"Other paper cannot be bought," she said.


After five years, the funds will be transferred into investors' regular accounts, which have some restrictions and which are known as type S.


Nomura Capital Management, which along with Credit Suisse First Boston has harshly condemned the debt restructuring, immediately blasted the five-year lockup.


"This is a classic example of expropriation," said Dan Jackson, managing director of Nomura Capital Management.


"Basically it means rubles have been confiscated until they're worthless," he said.


Analysts said Russia's tough stance on the deal had been expected.


"They were warned. I doubt that the last word has been written on the subject, but the Russian government has said on numerous occasions the terms for those who refuse the deal will be considerably worse," said Eric Kraus, head of fixed income at Dresdner Kleinwort Benson.


It was still unclear Wednesday how many foreign investors have bowed to Russia's much maligned swap terms that creditors have complained return just cents to the dollar of original investment.


Previous estimates had suggested 60 percent of the foreign investors were continuing to balk at the deal, but Zlatkis said Wednesday that many have changed their minds over the past few days even though the application deadline passed last week.


"Over the last two days a very large number of applications have come from nonresidents," Interfax quoted her as saying.


"I can say that the results of the exchange were much better than all the most optimistic hopes," she said. "A clear majority of foreign investors took part."


The Finance Ministry said it will release details Friday.


But Nomura said Wednesday that together with CSFB it was continuing to pan the deal.


"Nomura together with CSFB have definitely rejected the plan," Jackson said.


Officials at CSFB, which holds up to 40 percent of the foreign-owned component of the ruble debt, were unavailable to comment on Wednesday.


Russia's debt program offers foreign creditors 20 percent of their holdings in zero coupon bonds, 70 percent in four- to five-year paper with a gradually decreasing coupon and 10 percent in cash that can be used to invest in equities or repatriated at currency auctions.


The first currency auction was held Tuesday, and foreign investors made bids of $162.93 million, more than triple the amount that was offered, Interfax reported. The Central Bank sold the maximum amount, $50 million, at a rate of 26.98 rubles. The Central Bank's official rate is just above 24 rubles to the dollar.


Analysts complain, though, that the government has yet to clarify the equity investment scheme.


"It's still not clear exactly where creditors can invest the proceeds from the debt swap, which part can be used to invest in equity and which in bonds," said Parvoleta Shtereva, a fixed-income analyst at MFK Renaissance.


The Russian government has said creditors can use the proceeds from the debt swap to buy either Russian equity or dollar-backed bonds in industry.


The Finance Ministry has yet to officially list which stocks are available, but MFK Renaissance banking analyst Kim Iskyan said likely bets include electricity companies Unified Energy Systems, Mosenergo and Irkutskenergo, as well as Rostelecom and metals giant Norilsk Nickel.


The Finance Ministry said Wednesday that bonds in LUKoil and Gazprom could be available in the debt swap, but prospectuses on the bonds have only just been forwarded for approval to the nation's financial market regulator, the Federal Securities Commission.