Substitute Bonds: Foreign-Currency Income Inside the Rouble Perimeter

A substitute bond is a security of a Russian issuer whose face value and coupon are denominated in a foreign currency, while all settlements with the holder are made in roubles at the official exchange rate on the payment date. Your income is tied to the currency, but you need no foreign-currency account, no foreign depository and no transfers through unfriendly infrastructure to receive it: the obligation exists and is performed inside the Russian record-keeping perimeter. The whole logic of the instrument follows from this — both its yield and its risks.

What exactly was substituted

Before 2022, Russian companies borrowed foreign currency through Eurobonds — securities held in foreign depositories. When the payment chains broke, the issuer remained solvent, yet the money did not reach the holder: it was not the debt that failed, but the road to it. Substitution solves precisely this problem. The issuer places a local bond with the same parameters — currency of the face value, coupon size, payment dates, maturity — and hands it to the Eurobond holder in exchange for the old security or for an assignment of the rights under it. The economics of the debt are preserved; what changes is the record-keeping and the route of the payment.

The first substitutions took place in 2022 on the initiative of the issuers themselves. In 2023 the procedure became mandatory for them, with a deadline and a number of exemptions, and the deadline was later extended. The specific list of issues, their parameters and the terms of individual substitutions have changed more than once — for those it makes sense to go to the bonds section rather than to an article: I have no data on individual securities in my brief, and I am not going to make them up.

Where exactly the income comes from

The income is made up of the coupon, which is calculated in the currency of the face value, of the change in that currency's rate against the rouble, and of the bond's own price on the exchange. The coupon rate is fixed in the foreign currency, while the rouble amount that arrives in your account depends on the exchange rate on the payment date. The same applies at redemption: the issuer repays the foreign-currency face value converted into roubles.

This means that the yield to maturity of such a bond is a foreign-currency yield. It cannot be compared directly with the rate on a rouble OFZ or on a rouble deposit: these are figures in different settlement currencies, and the gap between them is not a premium but the price of a different risk. If it is unclear which yield your broker is actually showing you, look into that separately: how a bond's yield is calculated.

Which exchange rate is applied — and why this is no small matter

The conversion is made at the official Bank of Russia rate on the set date, not at the price you see in the exchange order book at the moment of payment. Since 2024 the official rate has been set on the basis of over-the-counter market data — see the over-the-counter exchange rate. The practical conclusion: your actual result is tied to an administratively published rate, and you have no control over the difference between it and the rate at which you could buy the currency yourself.

The risks that remain

Currency risk. The exchange rate does not only move up. Here currency risk is taken on deliberately: when the rouble strengthens, the rouble income shrinks, and the coupon does not make up for it. The extreme scenarios are described under currency crisis.

Credit risk. The payer is a Russian issuer, paying in roubles, out of its own revenue. Pegging the face value to a currency does not make the debt any safer — it merely shifts part of the exchange-rate risk onto the debtor itself. The logic of the issuer premium is examined in the piece on OFZ and corporate issues.

Liquidity and issue structure. The face value of these bonds is noticeably larger than the usual rouble one, the volumes in the order book are thinner and the spread is wider — an exit at a fair price is not guaranteed. There are issues where the face value is repaid in instalments: this changes both the schedule of cash flows and the meaning of the yield you are shown — see amortisation.

Infrastructure risk — reduced, but not zero. Substitution removed the foreign link. It does not rule out regulatory changes inside the country: the rules of trading, record-keeping and settlement are set by regulation and can change. The adjacent area is described under currency control.

How it differs from similar solutions

What sets it apart from a currency forward and a swap (currency forward, currency swap) is that the exchange rate is not fixed in advance here: you get the rate of the payment date, whatever it turns out to be. It differs from a rouble bond in that the cash flow is converted rather than set in roubles. It differs from a deposit in the absence of insurance and the presence of a market price that changes every day; this distinction is examined in the piece on deposit versus bond.

Taxes

The personal income tax base is calculated in roubles. Since both the coupon and the redemption amount already arrive in roubles, the exchange-rate component ends up in taxable income automatically — there is no separate "currency revaluation" here, as there is with a security settled in foreign currency. The general rules for determining the base: 13%. Check with your particular broker how the tax is withheld and how deductions are applied: the details for substitute issues have been handled differently by different professional market participants.

What to check before buying

Step 1 — the currency of the face value and the currency of settlement: they differ, and both characteristics matter to you. Step 2 — the issuer and its ability to service the debt in roubles; look for its financial statements in the reports section. Step 3 — whether there is amortisation, and the coupon dates. Step 4 — the real liquidity in the order book, not the declared size of the issue. Step 5 — the date as of which the exchange rate is taken for the conversion: it is set out in the issue documents.