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main buyers on the OFZ market next year. Over 7m18, locals bought RUB663bn of OFZs, according to the CBR, and it appears that they bought another RUB211bn in August and September. We expect local banks to buy at least RUB200bn in the fourth quarter of 2018 to meet regulatory requirements, so the total amount of purchases by locals this year should come to about RUB1 trillion,” Minko says. That means the missing RUB500bn the ministry wants to raise is exactly the amount that foreign investors have sold since April. However, if tensions ease, and if the US government balks at putting sanctions on Russian sovereign debt, then this foreign money could return – especially if the ministry is prepared to offer higher yields. But the ministry is also looking at alternatives for the missing RUB500bn. “We believe it is more feasible to place RUB1 trillion next year, while the remaining RUB500-700bn could come from the Finance Ministry's accounts at the CBR, which by the end of this year should amount to about RUB2 trillion. We think the borrowing target could be reduced if the ruble weakens sharply against the dollar. For now, we are waiting for the Finance Ministry to provide more details on the budget,” says Minko.
Russia's Finance Ministry would be ready to take emergency measures and buy out its own ruble debt should possible US sanctions proceed to the "nuclear option" and target country's sovereign borrowings, Deputy Finance Minister Vladimir Kolychev told Bloomberg TV on September 6. Russian ruble and OFZ federal bonds have been under heavy pressure since August as the sanction tensions reached new peaks . Foreigners have been pulling out of their OFZ holdings and yields rising, and the securities lost their investors 12% since July, on Bloomberg's estimates, the fourth-worst performance among Russia's peers. The share of non-residents in the OFZ market declined to 26-27% from the peak of 34.5% in March and 28% in July, according to Kolychev. He argued that the government has a comfortable cushion of RUB3 trillion ($44bn) of liquids assets to absorb any possible sell-off of $30bn-odd foreign OFZ holdings. As for potential threat of banning Russian state banks from using US dollars, private banks could continue as usual and the government could cover short-term volatility with necessary liquidity in both foreign and local currency, he claims. Even should the government be able to absorb the harshest sanctions as they hit, it would drain the budget considerably and seriously undermine Kremlin's bet on six-year state investment drive supporting the economic growth.
There were no Russian domestic bond sales in September – the first time the Ministry of Finance has not offered bonds for sales since 2014 – as the government gets ready for a possible sanctions induced storm in November. The Finance Ministry said it won’t sell ruble bonds, known as OFZs, for a fourth straight week to stabilize the market after the threat of US sanctions spooked investors. In their harshest form the new Defending American Security Against Kremlin Aggression Act ( DASKAA ) sanctions could ban purchases of new sovereign debt and shut state-owned banks out of the global financial system. US law makers are dithering over whether to include the OFZ in the new sanctions as they are widely held by US pension funds among others. But foreigners have already offloaded about 500bn rubles ($7.6bn) of OFZs from a total of $20bn since the last round of penalties in April, taking non-residents’ share to the lowest level in almost two years, Russia’s central bank said on September 24, or about 27% of the total outstanding.
Russia has also suspended the purchase of dollars on the currency markets. Russia’s central bank could have bought around $25-27bn on the
56 RUSSIA Country Report October 2018 www.intellinews.com