Page 73 - Russia OUTLOOK 2023

Expenditure cuts are likely should revenues continue to fall short, and in
October 2022 the MinFin already ordered 10% cuts across the board of
non-essential items like pensions. In addition, the finance ministry should, if
needed, be able to considerably increase net issuance of domestic debt as
domestic banks have plenty of ruble liquidity.

However, expenditure cuts would have significant medium- and long-term
consequences for the economy and the welfare of the Russian people. But
Russia succeeded in building up fiscal buffers through significant fiscal
consolidation after 2014, when sanctions were first imposed following the
annexation of Crimea. In this respect, the Fortress Russia strategy is working
as intended.

• Debt and gross international reserves

The Finance Ministry returned to the Russian capital market to borrow
heavily in late 2022, after taking a break for seven months after the war
started, and destabilised the OFZ domestic bond market. However, it didn't
borrow significantly more than planned.

~RUB2.2 trillion new net debt
~RUB1.0 trillion expiring old debt
~RUB3.3 trillion bond issuance in total in 2022.

The stock of Russian government’s foreign debt has been quite small in
recent years. At the end of 2021, the debt stock stood at just $63bn (3.5% of
GDP).

The value of Russian government Eurobonds owned by foreigners dropped
substantially after Russia’s illegal annexation of the Crimean peninsula in
2014, but recovered somewhat in the following years. In 2022, the value again
started to decline.

An even larger decline was recorded in the value of government domestic
bonds (OFZs) owned by foreign investors. The long-term rising trend was
abruptly reversed after the war started.

The movements in government debt markets are also dampened by
restrictions on capital flows.

Foreign financing has been much more important for the Russian corporate
sector. The stock of foreign debt (excluding the government and central bank)
was $380bn (21.5% of GDP) as of end-2021. Of that, about 30% was
denominated in rubles and largely related to direct investors (potentially of
Russian origin, as discussed above), whereas 70% was denominated in
foreign currencies, mainly US dollars.

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