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April 12, 2019 www.intellinews.com I Page 3
a synchronized slowdown in many markets in H2 2018 and multiple risks going forward (e.g. Brexit, trade frictions),” RZB said in a note.
Combined, these changes have made investors “risk-on” and “yield-hungry” again and given Russia’s rock solid macro fundamentals, Russian OFZ is one of the first port of calls. Russia’s bonds are about as safe a bet as it is possible to have
in the bond world as Russia's Fx/gold reserves reached $487.8bn as of April 1, 2019, according
to data from the Central Bank of Russia (CBR), their highest level since 2014 when the sanctions regime began. The level of reserves is now so high that Russia for the first time ever can cover its external debt dollar-for-dollar in cash. And that
is in a world where many of the leading central banks have interest rates close to zero and are running debt-to-GDP ratios in triple figures.
According to bne IntelliNews' Kremlin sources, the Kremlin is as worried about a fresh international debt crisis in the west as it is about more sanc- tions, so it has been selling off its US assets and accumulating gold reserves as part of its gross international reserves (GIR) as fast as it can.
All this has been driving foreign demand for OFZs where the auctions have seen record sales in
the first months of this year. As the chart shows there has been a sharp upswing in the share
of foreigners holding OFZs this year, which is now back to 30% and on course to overtake its previous record of 34% this year.
A further driver of bond investor interest is while big western economies are flirting with recession, growth in Central and Eastern Europe (CEE)
is holding up much better. The IMF predicts economic growth in Germany this year will be only 0.8% y/y, which is below expectations. The CEE region will see more balanced growth: the IMF
increased its 2019 growth forecast for Poland to +3.8% y/y, Hungary to 3.6% and Bulgaria to 3.3%, while cutting the 2019 expectations for Czech Republic to 2.9%, Slovakia to 3.7%, Romania to 3.1%, Belarus to 1.8% and Russia to 1.6%.
“Overall, the Fund sees Central Europe growth at 3.5% in 2019 and 3.0% in 2020, South-East Europe at 3.1% both in 2019 and 2020, and Eastern Europe (including Russia) at 1.6-1.7% y/y," RZB reported.
Bond investors at this week’s finance ministry auction mainly bought the long dated 10-year bonds, but the ministry also sold RUB50.4bn worth of the shorter dated July 2024 OFZs.
“The repositioning of foreign investors in OFZ helped to boost the investor appetite, which allowed the ministry to sell record amounts of OFZ this time,” RZB said in a note. “We believe that the type of non-residents entering the OFZ market today has changed in favour of more risk-tolerant funds while conservative investors already left the market last year. This helps OFZ rally and explains fewer worries about possible sanctions against the Russian state debt in future.”
RZB says that the expected appreciation of the Russian ruble this year has also help the appeal of the bonds – the ruble is down 7% against
the dollar this year and currently trading at RUB64.8 to the dollar, but with oil prices jumping to $71.1 this week on the back of renewed fighting in Libya the rate is expected to rise and will be further supported by a renewed OPEC+ production cut deal expected this month. Taking all this into account, RZB predicts that the yields on OFZs
will fall further to approach 8% as the OFZ yields have effectively become a sensitive barometer of sentiment towards Russia that has so far been steadily improving.