Russia offers rubles to holders of $2 billion dollar bond as it tries to limit the outflow of foreign currency

• Russia has offered to buy back its dollar-denominated debt and pay in rubles, for $2 billion worth of bonds that mature next month.
• Analysts said the move was aimed at limiting the flow of dollars out of the country and ensuring local investors are paid in full.

Russia has offered to buy back dollar-denominated bonds maturing early next month from investors and pay in rubles, as it tries to alleviate some of the pressure on the country's economy and financial system.

The government has $2 billion of dollar-denominated bonds, issued in 2012 that are due to mature on April 4. It filed to make interest and principal repayments on the $2 billion of dollar bonds on Monday.

But the Finance Ministry said Tuesday that it was also offering to buy back the bonds from investors in rubles, at 100% of their par value, at whatever the exchange rate is on March 31.

It said bondholders have until 5pm local time Wednesday to notify the government on whether they'll be taking up the offer. It was not clear how much of the $2 billion worth of bonds the government would be willing to buy back.

Analysts said the move was aimed at limiting the amount of dollars that are leaving the country, and ensuring local bondholders can receive the full payment for their investments.

Sanctions have all but cut Russia off from global financial markets and institutions. That's likely to make it difficult for Russian holders of the government's foreign-currency debt to get paid.

"It's possible by doing this through the domestic financial system, Russia is making sure those Russian residents get paid," William Jackson, chief emerging markets economist at consultancy Capital Economics, told Insider.

Paying in rubles would also allow Russia to keep its hands on precious foreign currency reserves, Jackson said. That's important because Western governments froze almost half of the country's $640 billion stockpile following the invasion of Ukraine.

"The freezing of the central bank's foreign exchange reserves means that Russia has to act much more carefully in terms of how it manages its spending of any foreign currency income," he said.

However, foreign investors are unlikely to take Russia up on the offer, given that they signed up to be paid back in dollars.

Jackson said domestic lenders may be more keen, because they may struggle to withdraw their money from the Western financial system if they're paid in dollars.

Russians are relatively large investors in the government's foreign debt, holding just under half of the roughly $39 billion outstanding, according to JPMorgan.

The government has so far kept up its payments on its foreign debts, despite many predicting it would default. It has made close to $200 million of interest payments in the last two weeks.

However, the offer to buy back dollar debt in rubles has once again raised questions about the government's ability and willingness to pay.

Analysts said the situation is highly uncertain and that whether or not Russia defaults largely depends on how long the war drags on and sanctions remain in place.

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