Russia Easily Sells $2 Billion of RUBLE-Denominated Debt

Russia's monetary policy is now so hawkish the country is able to sell debt in rubles, including to foreign investors

Between high reserves, budget surpluses, high interest rate, and most of all, historically low inflation rate for Russia creditors are now willing to be repaid in free-floating rubles

Russia’s Ministry of Finance is on a tear as it got another no-limits bond auction for its ruble denominated OFZ (“Federal Loan Obligations”) treasury bills away, setting a fresh record. In two fixed coupon OFZ auctions, Russian debt managers collected RUB124.6bn ($1.9bn) in total, Raiffeisen Bank (RZB) reports.

“The long-maturity 15yr OFZ attracted almost RUB40bn, while the rest was sucked up by the 2024 paper. The favourable external backdrop (i.e. mainly in the form of more favourable G2 central bank backdrop) as well as a certain sanctions “fatigue” combined with recently improved Russian economic fundamentals (i.e. mainly faster than expected CPI growth moderation) continue to attract various investor groups to Russian local debt, likely still including foreign investors,” said Stephan Imre, an analyst with RZB, in a note.

Russia’s ruble-denominated debt has thus jumped from about $7.7 billion to about $9.6 billion (an increase of 24 percent). Foreign investors hold about 30 percent of that (Russia abolished the ruble peg to the dollar in late 2014 ) 

Russia’s Ministry of Finance has held a series of record breaking auctions this year after a dearth last autumn when the ministry had to cancel several auctions because of the lack of demand.

Demand from foreign investors for the OFZ, the Ministry of Finance workhorse bond, has turned into something of a barometer of foreign investors’ sentiment towards the Russian market. OFZs were hot at the start of last year when most bond investors were overweight, but following the April 6 round of sanctions sentiment cooled and there was a RUB500bn sell off; the share of foreign investors in OFZs fell from a record 34% in April to finish the year at about 25%. However, since the start of this year the share of foreigners in OFZs has been creeping up again and was back to 30% as of the start of April.

Imre speculates that the share of foreign investors will probably continue to increase in March and April thanks to a number of factors. Russia’s macro economy is in rude health with strong tax collection and pre-crisis high gross international reserves (GIR). The economy is back into a triple – trade, currency account and federal budget – surplus, adding to the appeal of its high-yielding bonds that pay circa 8% per year in a world of near-zero interest rates.

Add to this the fading fears of more punitive US sanctions on Russia and the US Federal Reserve bank’s signals that it will not tighten monetary policy more this year.

While the Defending American Security Against Kremlin Aggression Act (DASKAA) sanctions are due to be considered by the US Congress in the first half of this year and could target more Russian companies as well as the sovereign bonds, investors clearly feel the danger of really painful new sanctions is fading.

The most painful part of last year’s April sanctions on Russian oligarch Oleg Deripaska and his Rusal aluminium producer have been dropped and in the last week Deripaska said he was in talks with the US Treasury Department (USTD) about dropping sanctions on his carmaker GAZ as part of renewed joint venture negotiations with Germany’s Volkswagen.

Finally bond investors were further buoyed by the milder than expected inflation feed through from a hike in the VAT rates implemented at the start of this year. While no one expects a rate cut at the next Central Bank of Russia (CBR) meeting due later this month, analysts are speculating that monetary easing may resume in the third quarter.

“Although we continue to expect another US sanctions round, it might be not necessary to respond with another rate hike (still our base case) from a CBR point of view. Our conviction regarding the latter has indeed decreased significantly and we will watch next week’s rate setting meeting closely for a possible revision of our base rate forecasts,” Imre said.

Source: bne Intellinews

  1. sarz says

    Why is a sovereign country issuing debt, even debt in its own currency? What would Michael Hudson (or any MMT theorist) say?

  2. thomas malthaus says

    Russian President Vladimir Putin discussing ditching the dollar.

    How fortunate Russia has low foreign or eternal debt. Debt to GDP is nearly 14 percent. Government spending as a percentage of GDP is nearly three percent. Amassing gold reserves at a record pace, one might assume that when a global gold and silver spot price reset occurs, Russia’s small budget deficits will disappear and the ledger’s asset side will see a marked increase. This will ultimately lead to, and likely has, to increasing infrastructure projects which can be effectively managed along with PM increases.

    This gives some credence why Mr. Putin is inviting foreign firms to Russia.

    I think the same might apply to China, though I see ghost cities and believe China is at least ten years overbuilt in residential and commercial. If you’re a wealthy Chinese investor holding gold, disavowing the dollar and euro, you’re searching for greener pastures.

    China’s introduction of BRO projects was likely conceived with these investors in mind, though Africa and Latin America are actively seeking Chinese investors.

    Putin: Russia not ditching dollar, dollar moving away from Russia

  3. JustPassingThrough says

    sanctions, trade wars, military interventions, chaotic internal politics, no foreign policy –how could so many idiots collect in one place at one time?

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