In recent months, Russian foreign currency bonds (denominated in dollars, euros, and yuan) have experienced a significant downturn, with yields surging past 15%. However, prices have begun to stabilize, and analysts from Alfa-Bank believe that a recovery trend is emerging. The recent price declines impacted all foreign currency bonds, regardless of issuer credit quality. For instance, dollar-denominated Gazprom bonds maturing in 2037 lost over 35% of their value, despite the company’s improved credit metrics. Similarly, Polyus yuan-denominated bonds dropped by more than 20%, despite the company being one of Russia’s most reliable issuers. Below, we examine the reasons behind this decline and assess the outlook for recovery.
Struggles with Foreign Currency Funding Amid Dedollarization
Since 2022, both individual and institutional investors in Russia have been shifting away from dollar and euro holdings, favoring “non-toxic” currencies such as the Chinese yuan. By March 2024, corporate deposits in non-toxic currencies surpassed those in toxic ones. While lending in non-toxic currencies has grown, Russian banks face limitations on yuan-based lending due to insufficient client deposits in yuan.
As of September 1, 2024, Russian banks had foreign currency liabilities totaling $163 billion and assets of $172 billion, leaving a positive balance of $9 billion. However, banks have been scaling back on foreign currency holdings, with the simplest solution being to sell foreign currency bonds. This increased the supply of these bonds significantly in the second half of 2024.
Previously, Russian banks hedged foreign currency exposure with derivative instruments on the Moscow Exchange. Yet, after the exchange was sanctioned on June 12, 2024, alternative hedging strategies became costlier and more complex. Volatility in the yuan surged, with the RUSFAR CNY rate exceeding 100% on some days (compared to about 8% before a sharp increase in September). This rise in RUSFAR CNY drove up yields on yuan-denominated bonds, intensifying the downturn in bond prices since the sanctions.
Russian banks, which account for approximately 62% of the total foreign currency bond market, were reportedly active sellers of eurobonds. The primary holders’ increase in supply was not offset by increased demand from other investors, leading to a decline in bond prices.
Anticipation of Sovereign Bond Substitution
Another factor pressuring the market is the anticipation of substituting sovereign eurobonds, which some expect could create a “supply overhang.” Russian banks, facing a shortage of foreign currency deposits, may be unable to absorb these new bond issuances, even at reduced prices, potentially leading to further price declines. While Russia’s outstanding sovereign eurobond volume totals $32.7 billion, the anticipated pressure from bond substitution is estimated at $2–3 billion. Alfa-Bank analysts consider this risk overstated, noting that prior corporate eurobond substitutions did not lead to increased secondary market sales; instead, prices on most substituted issues actually rose.
Additionally, 2025 will see a significant wave of foreign currency bond redemptions, totaling $11.9 billion (or 35% of total outstanding volume). This could reduce banks’ open foreign currency positions, opening the door for additional bond purchases, which could support prices.
Prospects for Recovery
Alfa-Bank analysts anticipate that by the end of the current year, foreign currency bonds may emerge as the only segment in Russia’s debt market to see a price increase. In the absence of other attractive currency investment options, investor interest in these bonds is likely to remain steady. Supply is also expected to contract next year, further supporting bond prices. Although risks of further declines remain, the current yields—over 10% in dollar-denominated bonds and over 13% in yuan-denominated bonds—appear attractive for investors holding to maturity.
The Path Forward
With foreign currency bonds showing signs of stabilization, these assets could be poised for a more robust recovery, provided that market conditions remain favorable. The anticipated reduction in supply, coupled with high yields and sustained investor interest, positions Russian foreign currency bonds as a potentially valuable asset for the coming year.
