Page 74 - Russia OUTLOOK 2023

The value of foreign debt denominated in foreign currencies has been on a
downward trend since Russia’s illegal annexation of Crimea in 2014. Even so,
there was still another sharp drop in the value after Russia invaded Ukraine.

As the situation with funding the budget deteriorates in 2023 thanks to
factors like the European oil embargo and the economic recession, the
government is intending to fund the expected 2-3% of GDP deficit using
the National Welfare Fund (NWF) and issuing more Russian Finance
Ministry’s OFZ treasury bills.

OFZ on the domestic markets are expected to rise from circa RUB2 trillion a
year to RUB3,500 trillion in 2023.

The transition to a fiscal rule in its updated version, according to a Ministry of
Finance plan, involves a structurally higher level of federal budget
expenditures relative to the previous version. OFZ placements will come as the
main source to finance a budget deficit, says the CBR.

The Ministry of Finance, back in the domestic debt market after a half-year
break, ramped up placements in November mainly through floating-coupon
securities (OFZ-PK). Their core buyers were banks that use OFZ-PK securities
to improve liquidity indicators, as well as to reduce the sensitivity of their
income to money market rates (interest risk).

The banks boast massive technical capabilities to purchase OFZ-PK
securities, according to the CBR. Yet the amount of financing available through
this channel is limited. A substantial budget deficit adds to demand in the
economy, thereby increasing pro-inflation risks. This factor should be
addressed in monetary policy.

Russia has very little external debt, which amounted to around 15% of
GDP in 2022 and is expected to rise to around 17% in 2023. Russia’s gross
international reserves (GIR) are more than enough to cover the entire external
and public debt dollar for dollar, even after the $300bn of frozen CBR funds is
counted out.

74 Russia OUTLOOK 2022 www.intellinews.com