Update: Impact of Russian invasion of Ukraine on capital markets of Ukraine and Russia

What’s the situation in Russia?

Since our update last week, the Russian market has remained closed except for a few transactions that are permitted such as buyback trades with settlement in roubles (RUB) and currency pairs derivatives instruments and commodities on the derivatives market.

Although last week cash payments and repatriation of cash were possible in most cases, except for money held at the National Settlement Depository (NSD) for settlement purposes, this week, the government issued Decree No.95 setting up temporary rules for sovereign and corporate debtors to make payments in RUB and foreign currency to creditors from “countries that engage in hostile activities” against Russia. Decree 95 implements the creation of Type S accounts to hold both cash and securities held by non-resident investors. All securities accounts opened by non-residents before 5 March 2022, automatically shall be converted into Type S accounts.

The new temporary procedure applies to payments exceeding RUB10m per month (or equivalent in foreign currency). The payments must be conducted in RUB into the Type S account opened with a Russian credit institution in the name of the non-residents or a Foreign Nominee Holder (FNH) in case the FNH holds securities on behalf of non-residents. The operating rules of this new type of account have been regulated by the Central Bank of Russia (CBR) but it is still unclear as to how they will operate in practice.

Fresh sanctions imposed on Russia

Additional sanctions have also been imposed on Russia:

Western governments have frozen the assets of CBR, limiting its ability to access US$630bn of its dollar reserves. The US, the EU and UK have also banned people and businesses from dealings the CBR, its finance ministry and its wealth fund. The EU, UK, US and Canada have launched a transatlantic taskforce to identify and freeze the assets of sanctioned individuals and companies.

Other UK sanctions include:

• major Russian banks excluded from the UK financial system, stopping them from accessing sterling and clearing payments;
• all Russian banks will have their assets frozen;
• the Russian state and major companies will not be able to raise finance or borrow money on UK markets; and
• a limit will be placed on deposits Russians can make at UK banks.

The sovereign ratings have also been downgraded to reflect the fact that credit rating agencies expect a default soon, following the sanctions and Russia’s inability to access its reserves.

The situation in Ukraine is similar, as the market has remained closed for all securities other than military bonds issued by the Ukrainian Government. These instruments can be traded on a free-of-payment and delivery-versus-payment basis on the secondary market (on-exchange and OTC) and through the Clearstream Banking SA link. Coupons and redemptions are paid by the National Bank of Ukraine (NBU) to investors accounts in UAH.

NBU Depository is allowing financial institutions to carry out transactions with the central counterparty (Settlement Center) in government securities, in order to meet their commitments under Repo Agreements with Risk Control concluded before the 24 February 2022 at 12.00am.

In addition, foreign exchange (FX) transactions are not allowed apart from foreign currency sale against UAH.

Thomas Murray’s response

In light of these developments, Thomas Murray downgraded the Financial Risk (FR) rating of the three cash correspondent banks for Russia covered in our Cash Correspondent Monitoring (CCM) programme: ING, Sberbank and Unicredit, to B.

The Financial Risk rating for the sub-custodians in the market has also been downgraded. Citibank Russia’s FR rating has been downgraded to B. For Sberbank, the Financial Risk grade has gone down one notch from BB to B. This has resulted in a change to the Overall Risk Grade from BBB to BB. Rosbank’s Financial Risk grade has gone down one notch from BBB to BB.

The ratings for the sub-custodian banks in Ukraine have also been reviewed and downgraded to BB following changes in the underlying risk components.

In addition, the ratings of the central securities depositories have been reviewed and the overall grade assigned to Russia’s National Settlement Depository (NSD) has been downgraded from AA- to B. This is the result of downgrades in most of the underlying risk components.

The overall risk grade of the National Depository of Ukraine (NDU) has been downgraded from A- to B, while the overall grade for the National Bank of Ukraine (NBU) depository has been downgraded from A to BB given that the market is open for military bonds.