Irish-based Russian debt due for repayment rattled by Ukraine invasion

Irish-registered bonds of Russian banks and companies that fall due for repayment in the near future have been rattled as the EU and US led a fresh wave of sanctions this week against Russia, while Russian forces early today mounted a wide-ranging attack on Ukraine.

On Wednesday evening, US president Joe Biden moved to ban US financial institutions from processing transactions for two major Russian state-owned institutions, Vnesheconombank (VEB) and Promsvyazbank, both of whom have used Dublin as a fundraising centre.

While VEB, a state development bank, was cut off from raising funds in western markets in 2014 as a result of international sanctions after Russia annexed Crimea in the Ukraine, it continues to have $3.7 billion of bonds outstanding that were sold before that date by its Irish-based VEB Finance vehicle. These include $1 billion of debt that falls due for repayment in July.

While credit ratings firm Fitch said in a report last summer that VEB can meet such a debt repayment from other sources and cash injections from Putin's government, if needed, the value of the maturing bonds have fallen to 89.6c on the dollar from 100c at the end of last week as the latest sanctions have eroded investors' confidence about getting all of their money back.

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Promsvyazbank bought back and cancelled more than $1 billion of Dublin-listed bonds in late 2019 after the bank was nationalised, ending its use of Ireland as a funding centre for its operations.

Meanwhile, the value of $2 billion of bonds issued by a long-standing Irish vehicle of Russian energy giant Rosneft, called Rosneft International Finance, have fallen almost 3.5 per cent this week to 96.7c on the dollar as investors eye next week's scheduled repayment date for the debt.

A 2020 research paper by Cillian Doyle and Jim Stewart of Trinity College Dublin estimated that Russian entities raised €118 billion between 2005 and 2017 through Irish special purpose vehicles (SPVs) as part of Dublin's role as an international location for the listing of everything from government bonds to the riskiest forms of corporate debt. Much of this has since matured.

The attraction for Russian firms in the early part of the last decade was the fact that while they could not, for tax and regulatory reasons, issue euro bonds directly, setting up an Irish SPV under a trust structure broke the direct ownership link to the original company.

A Central Bank paper published in late 2020 highlighted that "herding behaviour" often plays a role in why banks from a particular country select the same jurisdiction to set up SPVs. It is believed that the main buyers of bonds issued by Russian-sponsored entities in Ireland are Russian.

Russian companies’ use of Irish SPVs for fundraising fell in the wake of the 2014 sanctions, as a number of state-backed firms were prohibited from raising money in western markets.

A Russian banking crisis between 2014 and 2016, stemming from the impact of those economic sanctions as well as a slump in the value of oil at the time, resulted in investors in Irish-based bonds taking a hit.

Declared bankrupt

Some $60 million of bonds issued by an Irish SPV in November 2016 for a Russian bank called Tatfondbank, were deemed worthless months later after the borrower, which had been under investigation for fraud, was declared bankrupt.

Another lender, Vneshprombank, imploded in January 2016, resulting in the bank’s related Irish SPV defaulting on its $225 million of bonds.

While Russian firms have been big players in Dublin’s international debt financing sector, the country’s investors and assets play a peripheral role in the €4 trillion of Irish-domiciled investment fund assets.

Pat Lardner, chief executive of the Irish Funds industry representative bond, said that Russia was outside the top 25 locations of investors in Irish based-funds as of 2020. The smallest of the 25 locations accounted for 0.3 per cent of investors in Irish funds.

Mr Lardner said that Russia was the primary investment location for assets in only five of about 8,000 Irish-domiciled funds in 2020, with these focused on stock market indices tracking Russian publicly quoted companies.