Page 12 - RusRPTApr19

2.3 OFZ bonds under the sword of sanctions
Heavily overweight in the ruble-denominated state treasury bonds, traders dumped RUB500bn worth of these OFZ last year afraid the US government was going to ban trading, and even ownership, of one the most rock solid and highest yielding fixed income instruments in the world. The threat of new sanctions is still there, but in the last few weeks bond traders have snapped up OFZ in record amounts. The game has changed.
Ever since the global financial crisis struck in 2008 and central bankers around the world cut interest rates to near zero, yield-hungry bond traders have been scouring the world for fixed income assets that pays a decent return. It has not been easy as the only bonds with high yields are also very risk. Not so in Russia. For bond traders sanctions have been a boon, driving up yields, while the risk of default from the usual reason of a state running out of money, is extremely low. The bet is now entirely on if the US will target OFZ ownership as part of an expanded sanctions regime.
During his recent state of the nation speech Russian president Vladimir Putin boasted that for the first time ever Russia can cover its debt dollar-for-dollar with cash. Despite several economic crises in the last decade and anaemic economic growth, Russia has managed to rebuild its currency reserves, which stood at $476bn as of the end of January – the third largest reserve in the world.
Russia has never defaulted on its obligations and even in the 1998 financial blowout it restructured its GKO bonds, a precursor to the OFZ, delaying payment by five years, rather then outright defaulting on them.
And they pay well too. At the peak foreigners held 34% of all the outstanding OFZ last April, before the rout began, bring their share down to 24% by the end of the year. Demand fell so much that the Ministry of Finance had to
12 RUSSIA Country Report April 2019 www.intellinews.com